This Friday Ben Bernanke will present his view on the economic outlook at the Jackson Hole meeting in Wyoming. Nothing else is as important in the following weeks as his speech.Last time we got the hint that US will embark on QE2.
The effects were weaker dollar, rise in equities of 30% and most notably 600 billion of dollars pushed into the economy. But has it really worked? Not in my view.
Here is what Bernanke had to say about the economy one year ago: “However, although private final demand, output, and employment have indeed been growing for more than a year, the pace of that growth recently appears somewhat less vigorous than we expected.” Or “Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year. Much of the unexpected slowing is attributable to the household sector, where consumer spending and the demand for housing have both grown less quickly than was anticipated.”
The picture today is not much different as the incoming data is showing a US economy that is still underperforming. However, since last year a whole host of problems have risen: EU downgrades and sovereign debt problems have continued with Italy in the forefront, European banking sector is weak and undercapitalised, US has been downgraded after a scandal in Congress that has shaken the confidence of financial markets and China is trying to curb inflation which may lead to a slowdown in that economy. The picture today is more complicated and the problems have exacerbated instead of being solved. Not to mention that the one reason put forward by the Fed for QE2, increasing the assets values, has not worked as S&P500 index is pretty much at the same level as it was when QE2 started to be implemented.
All of this begs the question: what is this meeting going to bring us? Obviously the further easing of the quantitative kind did not work. As inflation relative to last year is higher in the US the QE3 seems the wrong option.Thus, I do not think there will be another QE3 in the US. In fact there is not much that the US can do now. The ball is in the EU side.
I expect will hear about QE for Europe and about a fiscal consolidation under one authority. This is pretty much what is left as policies at the global level. The US cannot do much right now, especially monetary policy. In fact, at the global level monetary policy has run out of instruments.
This year’s meeting of central bankers in Jackson Hole is not going to be about monetary policy but about fiscal strategies for US and EU. I only hope that the Fiscal Authorities have been invited also.