The market reaction after Ben’s speech would have you believe that he must have announced something important. A read of the document will contradict that conclusion. The main point of the speech is that markets should know that the FED is not out of tools to help the economy further. In fact the whole argument boils down to this paragraph:
“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.”
But unlike last year Ben does not go into detail about those tools. We might see some details on the minutes from the August FOMC meeting but for me this paragraph alone does not show too much confidence from his part. Furthermore he admits that monetary policy has limits to its powers:
” most of the economic policies that support robust economic growth in the long run are outside the province of the central bank. We have heard a great deal lately about federal fiscal policy in the United States, so I will close with some thoughts on that topic, focusing on the role of fiscal policy in promoting stability and growth.”
The later sentence of the previous paragraph introduces a lengthy section in the speech about fiscal policy in US and EU. I expected that and this is really the part that needs furher attention from markets.
Based on this speech I do not think that there is much credibility in the message from Ben regarding additional stimulus. Monetary policy in US and pretty much in the developed world has run out of instruments. In the short term it will be used as lender of last resort but if Fiscal problems are not fixed then we are back where we started.
The current rally is just a “junkie’s” reaction to hope that more “stuff” will be delivered soon. But most rushes do not last long and without action from the FED will see the markets again scrutinizing the strength of banks in EU, fiscal programs and their credibility.