Bernanke: Dissent Won't Impede Stimulus

Wednesday, 10 Aug 2011 10:31 AM

 

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Federal Reserve Chairman Ben S. Bernanke signaled he may expand record monetary stimulus over the most opposition of his tenure to revive the faltering recovery and reduce unemployment stuck around 9 percent.

The central bank said yesterday that officials “discussed the range of policy tools” to strengthen growth and are “prepared to employ these tools as appropriate” while pledging to keep the benchmark interest rate near zero until at least mid-2013. Three policy makers dissented from the decision for the first time since Bernanke, 57, became chairman in 2006.

“Bernanke will push through QE3 if the economic conditions warrant it,” said Steve Lear, who helps manage $150 billion at J.P. Morgan Asset Management. The first two rounds of so-called quantitative easing totaled $2.3 trillion yet have left the Fed with a recovery that officials yesterday judged to be “considerably slower” than anticipated.

Treasury yields plunged yesterday to record lows, stocks soared and the dollar fell on the Fed’s first move to bolster stimulus since November 2010, when officials agreed to the $600 billion second round of asset purchases.

U.S. stocks today gave up some of their gains, with the Standard & Poor’s 500 Index falling 1.9 percent to 1,150.48 at 9:50 a.m. in New York trading. The two-year government-bond yield dropped 0.02 percentage point to 0.172, while the 10-year yield fell 0.08 percentage point to 2.172 percent.

‘Elephant-thick’ Skin

“The chairman will do the right thing for the economy regardless of what people might say,” said Randall Kroszner, a professor at the University of Chicago’s Booth School of Business who served on the Fed board under Bernanke from March 2006 to January 2009. “Bernanke has shown his skin is elephant- thick.”

Yesterday’s decision to add a specific date to its commitment to low interest rates was a first for the Fed. Previously, the central bank promised to keep rates low for an “extended period,” which Bernanke defined as at least two or three meetings. That phrase was first used in March 2009 and was repeated at every meeting through June 2011. The Fed has eight regularly scheduled meetings a year.

Bernanke gained unanimity or near-consensus for his previous decisions since 2008’s financial panic. While one or two dissents from a Federal Open Market Committee decision aren’t unusual, a third would represent “open revolt” against the chairman, former Fed Governor Laurence Meyer said in his 2004 book, “A Term at the Fed.”

Eight Straight Times

Prior to yesterday’s meeting, there had been 23 dissents during Bernanke’s tenure as Fed chairman. Nine of those came from Kansas City Fed President Thomas Hoenig, who voted eight straight times in 2010 against record stimulus, tying former Fed Governor Henry Wallich’s record in 1980 for most dissents in a single year.

Yesterday, the FOMC “discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability,” without identifying the tools. “It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate,” the Fed statement said.

Economists interpreted the language as a sign of willingness to buy more bonds. The Fed purchased $1.7 trillion of mortgage debt and Treasuries from December 2008 to March 2010 and $600 billion of Treasuries from November 2010 to June 2011. Bernanke could give additional signals in his Aug. 26 speech at the Kansas City Fed’s conference in Jackson Hole, Wyoming, the venue he used last year to hint of the second round of quantitative easing.

Open Door

Yesterday’s statement “clearly leaves the door open for further asset purchases, or QE3,” Michael Gapen, a Barclays Capital economist and former Fed researcher, said in a research note. “We now look to the chairman’s comments” at Jackson Hole for further guidance on the FOMC’s thinking, Gapen said.

Central bankers downgraded their assessment of the economy’s progress. Growth this year has been “considerably slower” than expected and that economic data show “a deterioration in overall labor market conditions in recent months.”

Since the FOMC’s June 21-22 meeting, the Commerce Department said the economy grew 1.3 percent in the second quarter of the year. The government lowered its calculation of first-quarter growth to 0.4 percent from 1.9 percent. The economy added an average of 72,000 jobs a month since May, according to the Labor Department, compared with an average of 179,000 in the first four months of 2011.

Temporary Forces

In June the Fed attributed economic weakness in part to temporary forces such as higher food and energy prices and disruptions from the March earthquakes and tsunami in Japan. In yesterday’s statement the Fed said that these circumstances explain “only some of the recent weakness in economic activity.”

“Bernanke has an operational majority, and he’s not afraid to ram things through over the objection of the minority,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, and a former Fed researcher.

Echoing phrasing that preceded or accompanied interest-rate cuts in 2007 and 2008, the FOMC said that “downside risks to the economic outlook have increased.”

“They just lowered the threshold quite a bit for QE3,” said Diane Swonk, chief economist at Mesirow Financial Holdings Inc. in Chicago. “Short of a miraculous reacceleration in the second half, we will see QE3.”

J.P. Morgan’s Lear likened Bernanke to a golfer who would rather send the ball past the hole than strike it too softly. “You’re not going to come up short on your putt,” said Lear, deputy chief investment officer for global fixed income in New York. “He is not going to leave the fight against deflation short.”

--With assistance from Caroline Salas Gage in New York, Steve Matthews in Atlanta, Craig Torres and Jeannine Aversa in Washington and Vivien Lou Chen in San Francisco. Editors: Gail DeGeorge, Christopher Wellisz

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

© Copyright 2014 Bloomberg News. All rights reserved.

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