MacroScope

The big easy: Bernanke readies September move

September 8, 2011

Fed Chairman Ben Bernanke’s speech to the Economic Club of Minnesota was long on theory and short on details. Still, Bernanke made one thing clear: the central bank is revving up to ease monetary policy further. Most analysts are looking for some sort of effort to push down long-term rates at the September meeting. While Bernanke did not offer any further guidance on method, he did present a very distinctive sense of direction.

A renewed focus on growth ratcheted the Fed chief’s tone up a notch from his remarks at Jackson Hole:

The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability.

Bernanke also appeared keen to assuage the concerns of more hawkish Fed members.

We see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy.

And later in the speech:

In addition to the stability of longer-term inflation expectations, the substantial amount of resource slack that exists in U.S. labor and product markets should continue to have a moderating influence on inflationary pressures. Notably, because of ongoing weakness in labor demand over the course of the recovery, nominal wage increases have been roughly offset by productivity gains, leaving the level of unit labor costs close to where it had stood at the onset of the recession. Given the large share of labor costs in the production costs of most firms, subdued unit labor costs should be an important restraining influence on inflation.

Markets seemed to miss the point, selling off because of the Chairman’s lack of specificity regarding tools. Investors have other reasons to be nervous, including ongoing troubles in Europe, but the reaction to Bernanke appeared a bit overdone. Given the Fed chief’s efforts to get as much consensus on policy action as possible, it would have been ill-advised for him to preempt the discussion to be had at the Sept. 20-21 meeting by laying out detailed prescriptions in advance.

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