MacroScope

Jason Lange contributed to this post

Fed Chairman Ben Bernanke made no direct references to the outlook for monetary policy in a speech to the National Association for Business Economics on Monday. But the message from his heavy focus on a weak labor market was pretty clear: The Fed is not considering tightening policy in the near future and stands ready to do more if growth doesn’t pick up steam this year. Ironically, Bernanke’s pessimism cheered the markets – by signaling that another round of stimulus is not off the table.

Andrew Wilkinson at Miller Tabak captured Bernanke’s feat for the day:

It ain’t what you say it’s the way that you say it – at least that’s what Chairman Bernanke found out on Monday by not mentioning further quantitative easing.

After its last two meetings, the Fed said it would likely keep rates near zero at least through late 2014. But upbeat economic signs, including solid employment growth, have led investors to bet on a move as early as the middle of next year. Bernanke’s speech appeared aimed at pushing back against those expectations.

Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, reacted to the speech on the sidelines of the NABE conference.

Reading between the lines, it sounds like he’s pushing the ball forward towards having a discussion about doing more.

Sometimes, markets just don’t make a lot of sense. Take Fed Chairman Ben Bernanke’s two-day testimony this week. Bernanke was his usual dovish self on Wednesday, emphasizing risks to U.S. growth and the likelihood of slow progress on bringing down the jobless rate. Yet global markets suddenly panicked, apparently because the Fed chief did not directly give any hints of imminent easing. It’s surprising that markets would be surprised by this, however, given that few expected any such signals.

On Thursday, however, stocks recovered their footing. By then, it was time for the bond market to use the old Bernanke excuse for a decent selloff of its own.

Yet the basic message in both days of testimony was that economic conditions are still not to the central bank’s liking and that further action does remain on the table. Bernanke’s lack of faith in the recovery is striking:

Ask most economists why the distribution of wealth in the United States has become so unequal over the last three decades and they will likely offer a two word answer: skills gap. They point out that Americans with a college education have a lower jobless rate than those without one, and that better-educated workers make more money than their counterparts.

Yet as regional Federal Reserve presidents disclosed their personal asset holdings for the first time ever, the figures showed a gaping range: from the tens of thousands to the tens of millions.

The report showed the wealthiest officials, Richard Fisher and William Dudley of the Dallas and New York Feds respectively, made millions working the financial industry – Fisher running a hedge fund and Dudley as chief U.S. economist and partner at Goldman Sachs. It would be tough to argue that the two are any more skilled than the career PhD Fed economists who were at the bottom of the list.

The Federal Reserve, which on Wednesday sharply downgraded its outlook for U.S. economic growth and employment, appears to be seriously considering another round of monetary easing. In what would represent a policy U-turn, any third round of quantitative easing or QE3 appears increasingly likely to be heavily tilted toward purchases of mortgage-backed securities.

The idea was recently floated rather surprisingly by Fed Governor Daniel Tarullo, who normally focuses on regulatory issues. Some analysts had speculated Tarullo might not have broad support, but Fed Chairman Ben Bernanke’s comments on the matter during his post-meeting press conference on Wednesday suggested otherwise:

The housing sector is a very important sector. Problems in that sector are a big reason why our economy’s not recovering more quickly. I do think that purchases of mortgage-backed securities is a viable option. Certainly, something we would consider if the condition were appropriate. So the answer is yes, we will certainly look into that.

Will they or won’t they (ease monetary policy further)? The question will again garner investors’ attention this week as Federal Reserve Chairman Ben Bernanke and a number of regional Fed bank presidents take to the podium. The speeches come against a backdrop of ongoing worries about economic growth, but on the heels of a number of releases that were not as bad as feared. The bar remains high for the Fed to actively engage in a third round of quantitative easing or QE3 — it would probably take renewed deflationary rumblings to get there.

For now, the Fed is likely to focus on less drastic steps, such as new ways of communicating its policy targets, to satiate wobbly financial markets’ apparent need for ongoing monetary support. Here is the line-up of speakers for this week:

Bernanke will deliver remarks on ”The Effects of the Great Recession on Central Bank Doctrine and Practice” at the Boston Fed on Tuesday at 1: 15 pm EDT.

When it comes to the price stability half of their mandate, Federal Reserve officials have made one thing clear: they will not allow inflation expectations to veer very far from their preferred path. That’s because they believe inflation expectations are a good proxy for the pace of future price increases.

This applies both to the upside, when rising prices are a problem, and when the opposite is true, and policymakers fear deflation. The Fed argues that its second round of quantitative easing or QE2, when it purchased $600 billion in Treasury bonds, averted the risk of such a downward spiral of falling prices and wages, which can take years to overcome.

That’s why the latest figures from the Thomson Reuters/University of Michigan survey of consumer sentiment may strike a chord, particularly with the Fed’s more dovish camp. Inflation expectations one-year out dipped to 3.2 percent from 3.3 percent. Even more strikingly, 5-years out, consumers’ inflation projection fell to 2.7 percent from 2.9 percent. That was the lowest in a year and just 0.1 percentage point above the mid-crisis low of 2.6 percent.

U.S. Federal Reserve officials mulled a fresh round of bond purchases among other policy tools to ease financial conditions, according to minutes of their September meeting.

Fed officials discussed measures to ease monetary policy ranging from lengthening the average maturity in the Fed’s portfolio to lower long-term interest rates — the step they ultimately took last month — to providing explicit guidance about their goals for the labor market.

In a move known as Operation Twist, the Fed committed to selling $400 billion in short-dated Treasuries and use the money to purchase longer-term bonds. Following are some of the additional measures officials are debating:

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.

Think three dissents at the consensus-loving Federal Reserve are a lot? Try 435. According to St. Louis Fed President James Bullard, that’s how many dissents have been logged since 1936 by U.S. central bank policymakers unhappy with the decisions of the majority of their colleagues.

Internal disagreement at the Fed is unquestionably high, so much so that Fed Chairman Ben Bernanke on Friday said policymakers would meet for two days in September, not just one, to discuss their options more fully. Three regional Fed presidents — Dallas Fed’s Richard Fisher, Philadelphia Fed’s Charles Plosser, and Minneapolis Fed’s Narayana Kocherlakota — cast their vote against the Fed’s decision earlier this month to freeze short-term interest rates for two years.

“It depends a lot on the personalities involved, it depends a lot on the situation,” Bullard said of why some decisions draw more dissents than others. Bullard, who does not have a vote this year on the Fed’s policy-setting committee, said he also would have dissented, as did Kansas City Fed President Thomas Hoenig, the host of the annual Jackson Hole meeting of central bankers.

In Jackson Hole, where central bankers and leading economists from around the world are gathering for an annual meeting hosted by the Kansas City Fed, the talk is about the economy, what Fed Chairman Ben Bernanke will signal in his highly anticipated speech on Friday and what Warren Buffett’s purchase of a stake in Bank of America might mean for the beleaguered bank.

Here’s a smattering from interviews on the sidelines of the meeting, which begins in earnest with a formal dinner tonight:

– “QE3 is not in the cards, so don’t expect that,” Bank of America economist Mickey Levy told Reuters Insider, referring to the possibility of a third round of bond-buying by the Fed. Instead, the Fed may aim to reduce long-term rates by replacing some of the shorter-term securities in its portfolio with longer-term assets, he said.