This article is a guest contribution by David Rosenberg, Chief Market Economist, Gluskin Sheff.
“The economy has not yet arrived at a state where healthy and sustainable final demand is underpinning growth …, a recovery of the national economy is proceeding but not yet with solid and sustainable underpinning … The outlook from here is beset by somewhat more than normal uncertainty.” Atlanta Fed President Lockhart, June 30.
“Of course, even as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain. We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability.” Fed Chairman Ben Bernanke’s Semi-annual Monetary Policy Report to the Congress, July 21.
“The U.S. is closer to a Japanese-style outcome today than at any time in recent history … a better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.” St. Louis Fed Reserve Bank President Bullard, July 29.
“Information received since the Federal Open Market Committee (FOMC) met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.
To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.” FOMC press statement, August 10.
With the policy rate at 0%, and the longer-end of the Treasury curve some 100 basis points higher today than they were at the cycle lows, the Fed is embarking on action that it hopes will re-stimulate the economy. All the more so now that the public’s appetite for more fiscal largesse has clearly waned.
Political gridlock is probably what we will get out of the November mid-term elections, and in periods when nothing needs fixing, gridlock is not good – but today what we need is strong leadership. Mr. Bernanke has already spoken out on his views over the Bush tax cuts being extended, and that is because he has the prospect of a 1937-38 renewed collapse on his mind. And so after taking policy rates to 0%, and beginning the process of quantitative easing a year-and-a-half ago, he refrained from shrinking the Fed’s balance sheet as he had hoped to start doing last March and on Tuesday ratified that in the press statement.
