The U.S. Federal Reserve has exhausted nearly all of its resources in trying to help the U.S. economy, Chairman Ben S. Bernanke said in a speech Friday at Jackson Hole, WY.
Now it's up to the federal government to do its part by fixing U.S. fiscal policy.
"Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank," Bernanke said in his address to the annual conference in sponsored by the Kansas City Fed.
Some analysts thought Bernanke would hint at a third round of quantitative easing, but instead he handed off responsibility for reviving the economy to Congress and the White House.
The absence of any policy changes at first disappointed Wall Street – the Dow Jones Industrial Average fell 220 points immediately following the speech – but the negative sentiment didn't last. The Dow closed up 134.72 points, or 1.21%, while the Standard & Poor's 500 Index rose 17.53 points, or 1.51%.
"The Federal Reserve Chairman may have left the door open for more easing measures, but he has given the markets nothing concrete this morning," John Kilduff, a partner at Again Capital LLC, told Reuters. "It appears the Fed has stepped back, leaving us to await efforts from the White House and Congress, if any, to bolster theeconomy. This is a bearish development."
The only tidbit of fresh information Bernanke offered in his Jackson Hole speech was the extension of the Federal Open Market Committee's (FOMC) September meeting from one day to two (Sept. 20-21), "to allow a fuller discussion" of the "merits and costs" of the Fed's policy options.
"He was rather boxed in in terms of what he could say," Julian Callow, an economist at Barclays Capital PLC (NYSE ADR: BCS), told Reuters. "The markets have been increasing pressure on him to say more, but he needs to take the FOMC with him."
The Debt Threat
Bernanke had much more to say about the role of Congress and President Barack Obama in fixing the economy and taking meaningful action to arrest soaring federal deficits.
He actually came close to scolding Washington's politicians for the contentious debt ceiling debate.
"The negotiations that took place over the summer disrupted financial markets and probably the economy as well," Bernanke said, warning that more of the same in the future could "seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses."
Bernanke also said the economic well-being of the United States depends on responsibly dealing with the national debt.
"As I have emphasized on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage," Bernanke said.
At the same time, the Fed chairman warned lawmakers to be mindful of any debt reduction moves that might adversely affect the economy.
Bernanke recommended fiscal policymakers develop "a more effective process that sets clear and transparent budget goals, together with budget mechanisms to establish the credibility of those goals."
Better Days Ahead?
A significant portion of Bernanke's Jackson Hole speech was devoted to the struggling economic recovery. He revisited the causes of the recession and blamed the deep housing slump and the financial crisis of 2008 for the sluggishness of the recovery.
Yet despite a seemingly endless stream of bleak economic data, the Fed chairman sounded an optimistic note on the long-term prospects for the economy – assuming Washington does its part.
"Notwithstanding the severe difficulties we currently face, I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if–and I stressif–our country takes the necessary steps to secure that outcome," Bernanke said.
He cited numerous economic strengths of the United States, including its "diverse mix of industries," its "robust entrepreneurial culture," its position as a technological leader, and its "flexible capital and labor markets."
Still, Bernanke admitted "the economic healing will take a while, and there may be setbacks along the way."
While Bernanke promised that "the Federal Reserve will certainly do all that it can to help restore high rates of growth and employment," he made it clear the Fed can't do it alone — the nation's politicians must get serious about resolving their differences on fiscal policy.
"The problem is the intractability in Washington leaves the fiscal alternatives pretty much on the sidelines," Jack Ablin, chief investment officer for Harris Private Bank in Chicago, told Reuters. "I think that now, [Bernanke] has obviously passed the ball back to Washington."
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- U.S. Federal Reserve Website:
Text of Chairman Bernanke’s Jackson Hole speech