Bernanke Leaves Door Open for More Easing, Chides Congress

In Jackson Hole remarks, Bernanke gave no policy specifics.

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Ben Bernanke 2.0 turned out to be a lot more sober than the original version.

Last year, at the annual Federal Reserve symposium in Jackson Hole, Bernanke outlined an array of monetary policy options, including what came to be known as QE2 for "quantitative easing," a second dose of the nation's central bank buying up hundreds of billions of dollars in assets held by financial instituions in order to boost money supply.

But with the U.S. economy moribund—growth in the second-quarter gross domestic product was revised downward today to 1.0 percent from an already weak 1.3 percent—Bernanke has few options left. So, he spoke instead of doing all that is possible to keep the economy afloat while tossing a few barbs in the direction of Capitol Hill. But that was enough to send the stock market soaring, even though Hurricane Irene was steaming full speed toward Wall Street.

[Read about how Rick Perry pushed Bernanke into the political limelight.]

In his long-awaited remarks, Bernanke asserted that the Fed "has a range of tools that could be used to provide additional monetary stimulus," and that the central bank would continue to consider those tools at the September Federal Open Market Committee meeting, which has now been extended from one day to two days. Instead, Bernanke emphasized the need for sound economic policy on a broader scale, touching briefly on a range of topics, including housing, trade, taxation, education, healthcare, and the recent debt ceiling fight.

Bernanke's lack of expansiveness surprised some. "I would have expected him to expand a little bit more on [the possibility of more monetary stimulus], and instead, he kept his cards very close to his vest this time around, which is different from one year ago," says Adolfo Laurenti, deputy chief economist at Mesirow Financial, a Chicago-based financial services firm.

Bernanke instead spent a significant portion of his speech examining the financial crisis, recession, and recovery that created the current U.S. economic situation, and then addressed broader economic conditions that could affect future growth, like weaknesses in the educational system and an aging population. He also emphasized the need for creating a "sustainable path" for U.S. fiscal policy without disregarding the "fragility of the current economic recovery."

The Fed chairman also issued a rebuke to Capitol Hill for the recent shenanigans over the debt ceiling. As the final point in his speech, Bernanke noted that the months-long fight over whether to pay the nation's bills could lead to future troubles, including a global crisis of confidence. "The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses," he said.

[See how EU austerity could hurt economic growth.]

The pointedness of these remarks was uncharacteristic of the rhetoric that usually emanates from the cloisters of the Fed. "I think it was interesting the emphasis the chairman put on discussing fiscal policy and policy-making at large," says Laurenti. "I really think the surprising thing to me was how broad his remarks were, and I think that was an implicit rebuke of the debacle that we have seen [surrounding raising the debt ceiling]. He was very explicit about that."

While the speech did not include specific discussion of further monetary stimulus, it also did not rule out such a move. In fact, Bernanke's remarks hinted that the door is still open to further easing. Bernanke said that the FOMC "is prepared to employ its tools as appropriate," and also crucially discounted the risk of inflation, saying that the Fed expects inflation to "settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most [Federal Open Market] Committee participants view as being consistent with our dual mandate." This is a key point, as one drawback to major monetary stimulus is the possibility of spurring or accelerating inflation.