Market News
August 31, 2012 @ 10:20 pm

Bernanke Defends Earlier QE’s Using Shady Research, Doesn’t Offer Big Clues On the Next One

The long awaited Bernanke speech at the central bankers conference in Jackson Hole has come to pass with no clear hints on future easing. In his speech released at 10 AM New York time, the Fed Chairman Ben Bernanke defended the Central Bank’s earlier easing policies. He did strike a somewhat dovish tone on the U.S. economy and this was interpreted by some as a code for further easing, but lets go over this other remarks first.

Bernanke defended LSAPs (large scale asset purchases) by citing research that apparently showed “that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred”. But later he adds a caveat to this research by saying that “It is likely that the crisis and the recession have attenuated some of the normal transmission channels of monetary policy relative to what is assumed in the models”.

The study uses the Fed’s Board FRB/US model of the economy and basically the way I interpret this is that the models assume that the purchases made by the Fed would have raised GDP by some amount even if that didn’t happen in the real world. It’s also important to note that the U.S. has been experiencing a very slow recovery in the economy and particularly in the jobs market compared to the recoveries in previous recessions. So maybe the research should focus on what is actually happening instead of focusing on what the models assume will happen.

Bernanke later cites the “positive” effects of such easing operations, like lower yields on government and corporate bonds but he of course leaves out of negative effects of the lower rates for savers. He does mention that the low rates may force market participants into higher yielding and riskier assets. In other costs of what he calls “nontraditional policy” he cites 3 other problems: possible impairment of market functioning, concerns about the Fed’s ability to exit smoothly from its accommodative policies and finally possible losses on the Fed’s balance sheet in case of a rise in interest rates.

The speech concludes with a dovish outlook on the economy where Bernanke mentions a slow recovery in housing, government fiscal drag and market stress mainly from the Euro Crisis. The Chairman finished by saying that “we must not lose sight of the daunting economic challenges that confront our nation” and adding that he has a grave concern for the weak labor market.

The last comments on the jobs market have prompted some to speculate on future easing moves. Scott Graham of BMO Capital Markets had this to say: “I think when he talks about grave concern, that says it all. Further accommodation is coming, it’s just a question of how it manifests itself”.

The markets reaction to the release of the speech at 10 AM has been very erratic. We’ll use the Dow Jones Index as example although the same pattern happened in the forex markets. The DJ was trading at 13,087 at the time of the release, the Index lost 81 points in the 10 minutes after the news, reaching a low of 13,006, only to recover and hit a daily high of 13,143 later in the day. The Dow closed the week at 13,081, not far away from where it was trading pre-release. See the chart below.

The EUR/USD repeated the same pattern, falling 34 pips just after the news, then surging 73 pips to a daily high of 1.2636. The single currency closed the week at 1.2577, 20 pips lower from its pre-Bernanke price but still up 72 pips on the day. In conclusion the markets seem to be confused about what will the Fed do next.

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About Fx_Livermore

Fx_Livermore has over seven years experience in forex trading. He uses a mix of technical and fundamental analysis in his trading. His posts should not be taken as trading advice/recommendation to buy/sell any currency/security.

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