Markets throw back Bernanke life preserver

Federal Reserve Board Chairman Ben Bernanke threw financial markets a life preserver, but the markets have thrown it back, disappointed that the U.S. central bank was not preparing another quantitative easing ocean liner to come to its rescue, Fed watchers said Wednesday.



Markets were correct to pick up on the fact that Bernanke’s speech did not contain any hint the Fed is thinking about expanding quantitative easing, said David Resler, chief economist at Nomura Securities International Inc.

“Monetary policy cannot be a panacea” as the economy recovers at an uneven pace from the financial crisis, Bernanke said in the speech to international bankers in Atlanta.

Bernanke’s remarks were greeted by a wave of stock selling that continued overseas and into today’s trading session DJI -0.18% .

Resler said stock traders mistakenly think that “if the Fed is not buying Treasurys than no one will buy stocks” and are missing the point.

Even though the hurdle remains high for another round of asset purchases, Bernanke said that easy policy will be maintained until the economy shows clear signs of strong activity, Resler said.

“Accommodative monetary policies are still needed,” Bernanke said.

“Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established,” the Fed chairman added.

Although the Fed’s second round of quantitative easing, $600 billion of Treasury purchases, will end on June 30, this is not the end of easy policy, Resler said.

The Fed has promised to maintain the size of the balance sheet after June 30 by reinvesting maturing securities.

This is equivalent to the Fed cutting rates and then leaving them at the lower level.

Jan Hatzius, chief economist at Goldman Sachs Group, said the speech is consistent with his belief that tightening remains far off but the FOMC is also not close to renewed monetary easing.
“In short, we remain well within the ‘zone of inaction’ for the Fed, Hatzius said.

In his remarks, Bernanke tried to downplay recent signs of a soft patch, saying jobs and growth would pick up after June.

But he didn’t do a very convincing job, said Michael Moran, chief economist at Daiwa Securities in New York.

“He never talked about vigorous growth, or say 4% to 5% growth is possible in the future,” Moran said.

In his remarks, Bernanke said “growth seems likely to pick up somewhat in the second half of the year,”

This “somewhat” suggests only a return to about a 3% growth rate from the disappointing likely 2% or so growth rate in the first six months of the year, Moran added.