Fed hints at QE3 but knows its not enough – recession is on the way.

Markets had been waiting with baited breath all week for Fed Chairman Bernanke’s speech at Jackson Hole but while it was interesting the reality was that it came and went with little fanfare and little in the way of any further clarification over if and when the Fed will use the

 range of tools that could be used to provide additional monetary stimulus

I have written in this space and others about former Fed Chairman Greenspan’s admission that in the wake of 9/11 he held his breath and said what he thought the market wanted to hear and hoped he was right. So it was over the weekend that Bernanke did a similar thing in my opinion.

His speech was titled: The Near-and Longer- Term Prospects for the US Economy and while he remains optimistic on the long run prospects for the US economy the key message was that the Federal Reserve cannot be solely responsible for doing all the heavy lifting to ensure the US economy will once again grow at its full potential and much of the responsibility actually lays with the governments, and its pursuit of effective fiscal policy, with Bernanke saying that

most of the economic policies that support robust economic growth in the long run are outside the province of the central bank

This is where the hit and hope bit comes into play because while Bernanke ensures us he has more tools at his disposal, monetary policy alone will not be enough and without the assistance of fiscal policies designed to ensure that the US governments long-term fiscal sustainability will be achieved while fostering growth over the short run, gentle Ben will find he is lacking enough ammunition to go it alone.

He is on dangerous and tenuous ground here because after two rounds of QE the Fed has not been able to revive the US economy which is slipping back into recession as we wrote last week .

Dangerous because he is opening a new front against the Congress and lawmakers in particular and while we all know it is they who have built up the deficit and it is their intransigence with regard to the recent debt ceiling debate that has made things worse for the confidence in the outlook for the economy they will lash back – of that I am sure. In many American’s eyes the Fed lacks oversight and this is just a red rag to a bull.

Tenuous because he is losing his ability to persuade Americans particularly and the global community more broadly that he can actually do anything other than pump up the tyres of asset markets, debase the USD and export the US’s economic problems elsewhere.

We wonder how he reckons that over the short run he said that the some of the forces that slowed growth over the first half of the year were expected to abate over the second half of the year. Clearly much of the recent surge in market volatility was as a result of the US debt ceiling negotiations and the policy and political vacuum this threatened to open up. On which Bernanke said

Bouts of sharp volatility and risk aversion in markets have recently re-emerged in reaction to concerns about both European sovereign debts and developments related to the U.S. fiscal situation, including the recent downgrade of the U.S. long-term credit rating by one of the major rating agencies and the controversy concerning the raising of the U.S. federal debt ceiling. It is difficult to judge by how much these developments have affected economic activity thus far, but there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth

We’d argue that these things are undermining confidence and increasing uncertainty and as we always say – uncertainty is poison to an economy and markets (in a stability sense anyway – traders love it).

RBA Governor Stevens shared a similar sentiment on the recent surge in uncertainty in his opening remarks to Parliament last Friday saying

It would be reasonable to anticipate that a decline in confidence arising from the recent events internationally may well dampen demand somewhat compared with the outlook set out in the Statement on Monetary Policy published in early August.

Yep and unfortunately there is little central bankers can actually do to deal with it which was the underlying message of the Bernanke speech. Lawmakers must do something and the Fed and our own RBA will do their bit. But as uncertainty increases and Europe continues to teeter like a toddler learning to walk and the US economy slipping back toward recession is unhelpful in the extreme. This market and economy is with us for some time.

Perversely though with Bernanke signalling that he’s got nothing but hinting at something, risk assets may rally temporarily before the economic reality hits home

Greg McKenna and the Lighthouse Research Team

Khao Lak Thailand and Newcastle Australia

This blog is for information only and does not constitute advice. The Lighthouse Securities Research Team has not taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.


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