Much to the chagrin of Fed watchers everywhere, Ben Bernanke did not indicate that more quantitative easing was imminent during his speech at the Fed's annual symposium in Jackson Hole, Wyoming. The buildup to the event in terms of media coverage and market anticipation has given the whole thing a circus-like feel as terms like "quantitative easing" and "zero interest rate policy" previously relegated to obscure policy discussions between economists have become cocktail party conversation starters and Ben Bernanke has become a household name. Today however, Bernanke the celebrity took a back seat to Bernanke the academic. As CNBC noted, sounding perceptibly disappointed,
"...rather than deliver a substantial shot of adrenaline, Bernanke's speech was mostly an academic exercise that explained the Fed's rationale for its actions since the 2008 financial crisis, with just a smattering of its intentions going forward."
Contrary to popular belief, this is precisely what Bernanke should be saying rather than using public speeches to debut new iterations of previously "unconventional" measures, as though he is a director screening a trailer for a new blockbuster sequel. Mercifully the Chairman seems to have taken heed to the growing chorus of critics. Notably, when Bernanke did discuss asset purchases he was quick to point out that the public's perception of rising prices can translate to real world price increases in the event that confidence in the Fed's ability to control inflation erodes substantially:
"A second potential cost of additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed's ability to exit smoothly from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability."
Of course the heightened public scrutiny of the Fed's actions doesn't help this situation as I noted in a previous article:
"...if the public's inflation expectations are increasingly unpredictable and this increase in volatility is accompanied by a widespread realization that the Fed continues to pursue expansionary policies, it seems to me that the conditions are ripe for a sudden increase in expectations followed in very short order by an actual rise in prices."
Bernanke also addressed the notion that he has become too confident in what monetary policy can accomplish. Although this is a concern shared by many, it found a particularly abrasive voice Thursday in the person of Republican senator Bob Corker who opined in a Financial Times op-ed that the Fed Chairman should "show some humility". Happy to oblige, Bernanke said the following about the limits of monetary policy:
"...nontraditional policies share the limitations of monetary policy more generally: Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces. It certainly cannot fine-tune economic outcomes."
Of course Bernanke's speech wasn't all conciliatory. The Chairman did note that despite cries of inflation, prices have remained largely in line with the Fed's target range. Additionally, Bernanke pointed out that the policies pursued by the Fed over the course of the recession have largely been a success:
"Key sectors such as manufacturing, housing, and international trade have strengthened, firms' investment in equipment and software has rebounded, and conditions in financial and credit markets have improved."
Of course Bernanke was essentially faced with a lose-lose scenario going into the speech. If he trumpets the successes of nontraditional policies in combating the recession, then claims that at the current juncture, the long-term risks may outweigh the benefits of more easing (which is essentially what he did) he will be criticized for not providing the shot in the arm the economy and the market needed. If, on the other hand, he had downplayed the risk factors inherent in the implementation of more quantitative easing and used the slow pace of the recovery as justification for the announcement of more asset purchases, he would have been criticized for not paying enough attention to the long-term negative effects of balance sheet expansion and market manipulation. Given the circumstances, Bernanke probably took the path of least resistance by simply acknowledging all the pros and cons and repeating that the Fed stands ready to act.
Unfortunately for equities, this simply isn't good enough given that stocks are still near four year highs in the face of enormous headwinds from Europe and considerable doubts about the strength of the recovery. I fear that without more QE, stocks will begin to lose ground as without the Fed's counterbalance, reality will begin to forcefully reassert itself. I recommend shorting the S&P 500 (SPY) and going long volatility.