Ben Bernanke Leaves Door Open for More Quantitative Easing

Central banker provides a few more reasons to anticipate QE3 in his Jackson Hole speech.


Help is (possibly) on the way.

That is the message today from Jackson Hole, Wyo., where Federal Reserve Chairman Ben Bernanke indicated in a much-anticipated speech that a third round of quantitative easing, or "QE3," is still an option for the nation's central bank in the face of a persistently weak economic recovery.

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Bernanke told assembled central bankers and monetary policy experts at the Kansas City Fed's annual symposium that "the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant."

At this point, it's nothing new for the Fed to signal that easing is still a possibility. The Federal Open Market Committee's most recent minutes reported that many members think that more accommodation "would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery." And the FOMC has also in the past signaled that it is ready to take "further action" as necessary.

But Bernanke gave a little more reason to think easing could happen. He seemed to defend past easing, saying that nontraditional policies "can be effective, and that, in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred."

In addition, he said he does not believe that long-term structural problems are holding back the economy. Rather, he pointed to housing, uncertain fiscal policy, and uncertainty in Europe as the current barriers to economic growth. While monetary policy cannot solve all of these problems, the indication that cyclical factors are to blame seems to signal that the Fed feels it can do something to help.

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"By defending past action and establishing the limited downside to future action, I think Bernanke is clearing the path for easing in late 2012," says Guy LeBas, chief fixed income strategist at financial services firm Janney Montgomery Scott.

He also adds that one key number, the current inflation rate, also points to room for more easing. Core personal consumption expenditure inflation, the figure that the Fed uses, was at 1.6 percent year-over-year in July, below the 2 percent rate that the Fed deems optimal.

"That's a low level of inflation, and I would expect the Fed to work to try to bring that up over time, to the extent they can," says LeBas.

While Bernanke left the door wide open, he was also evenhanded, stressing that special care and consideration should be used when considering unconventional polices: because of the potential costs associated with them, "the hurdle for using nontraditional policies should be higher than for traditional policies," he said. He also took care to lay out the risks of large-scale asset purchases: They could hurt the functioning of financial markets, threaten financial stability, cause losses at the Fed, and damage public confidence in the Fed's ability to unwind those policies.

If Bernanke did indeed lay more groundwork for easing today, the question is: Will it work? LeBas is skeptical.

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"Banks are not lending right now because there's zero consumer and business demand for lending. So all of the Fed methods in the world are not going to solve that problem," he says.

Then again, even Bernanke acknowledged that the Fed would not be able to singlehandedly pull the U.S. back into robust growth.

"Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces," he said.

Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via E-mail at