As I mentioned in yesterday’s blog, unlike what you hear from economists and market pundits, Fed Chairman Bernanke still has plenty of ammunition left. In that post (see here: Counting Down to Jackson Hole), I urged readers to link to Bernanke’s 2002 speech where he outlines his playbook. In other words, economic tools that he already has deployed over the past few years, as well as those other tools that he has at his disposal even in a zero-rate environment (as an aside, I can understand why the casual investor/reader doesn’t read this long, and oftentimes tedious material, but economists who are quoted in Barron’s have absolutely no excuse).
A key passage in this mornings speech (arguably the most important part) is where he reiterates the message in that 2002 speech. Here is what he said:
Early in my tenure as a member of the Board of Governors, I gave a speech that considered options for monetary policy when the short-term policy interest rate is close to its effective lower bound. I was reacting to common assertions at the time that monetary policymakers would be “out of ammunition” as the federal funds rate came closer to zero. I argued that, to the contrary, policy could still be effective near the lower bound. Now, with several years of experience with nontraditional policies both in the United States and in other advanced economies, we know more about how such policies work. It seems clear, based on this experience, that such policies can be effective, and that, in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred.
And then the sign that more stimulus is coming when markets once again falter:
Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
Rightly or wrongly, equity markets like short-term stimulus. And at this point, market’s are reacting positively to Fed Chairman Bernanke’s speech.