Bernanke’s message: we can get out of this hole
We may not be in such a bad hole here but if we are, we can get out of it. That is likely to be the message from Ben Bernanke, the U.S. Federal Reserve chairman, to bankers and policymakers at their annual powwow in comfortable Jackson Hole on Friday.
Bernanke’s keynote address comes at a moment of overriding fear for the U.S. and global economy. U.S. housing data this week were awful. Last week’s weekly jobless claims figure was alarming, though this week’s was marginally less so. Durable goods orders, excluding transportation, suffered their biggest fall in July for 18 months. To the markets, all of this is suggestive of the dreaded double dip.
The pace of economic recovery is disappointing, as Bernanke will probably admit. Job growth is anaemic. U.S. inflation, at 1.2 percent, is very low because goods are abundant but consumers reluctant. Deflation would mean that even ultra-low interest rates remain positive in real terms — and are therefore not the positive incentive to spend that the Fed wants to provide.
Nevertheless, Bernanke can argue that the second dip is probably not coming. The U.S. economy has grown for four consecutive quarters and is probably still expanding. Housing’s inevitable plunge from the bubble that began it all may finally be over.
But above all the Fed boss will almost certainly remind the world that the Fed can, and will, act if recovery really is failing. It will, if necessary, engage in a new round of quantitative easing, printing money that it would pour into long-term securities to flatten the yield curve and stimulate borrowing by companies and individuals.
Some Fed members are said to be reluctant to take another flight in the dollar-dropping helicopter imagined by monetarist economist Milton Friedman. And it is to be hoped that is the case. For patience may be all the recovery needs, not further monetary stimulus and, still less, fiscal spending. But if the hole proves deep, the helicopter will fly. By restoring confidence with that message, Bernanke may hope he can keep it parked on the helipad.