Market reactions to Ben Bernanke’s Jackson Hole speech have generally viewed it as slightly more dovish than expected, without being a game changer. The Fed Chairman said that the stagnation of the labour market is a “grave concern” because of “the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years”. On reflection, these are extremely strong words for a central banker. It would make little sense if they are not followed by action.
The important question, however, is what kind of action will be forthcoming. The market is disposed to believe that only one kind of action really matters, and that would be a further round of quantitative easing. That, it seems, is seen as the real litmus test of whether the Fed is serious about stimulating the economy.
Most US economists now believe that the FOMC will announce QE3 before the year end, and many say that there is a 50/50 chance of this occurring at its next meeting on 12-13 September. Based on what the Chairman said on Friday, there is certainly no reason to dissent from this view. However, there are serious grounds for asking whether another round of plain vanilla QE would be effective, and whether there should be further changes in communications policy to support it.