Jackson Hole

Jackson Hole
August 26, 2011
Bob Eisenbeis

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Markets dipped when Chairman Bernanke failed in his Jackson Hole speech to deliver the hoped-for elixir of QE3, then rallied as attention turned to other issues like Hurricane Irene. But market expectations were unrealistic and motivated by self-interested desire for a positive jolt to equities, rather than a realistic assessment of Federal Reserve policy or what should or should not be done in the interest of the country.

Consistent with the theme of the Jackson Hole conference, which focused on longer-term growth issues facing the economy, Chairman Bernanke described the present state of the economy, current policy, and what the Fed and rest of the government could and couldn’t do to promote expansion and growth. He indicated that while the “hoped-for” pickup in the economy the FOMC expected earlier in the year had failed to materialize, the economy was still expanding; and over the longer run he did not believe that growth fundamentals had been seriously compromised by the shocks the economy had experienced during and after the financial crisis. Indeed, he said, the most likely scenario would be slow growth and a gradual recovery.

There were, however, several important parts of the speech that provided a realistic and objective assessment of why the recovery has been slow to materialize. Bernanke made it clear that he believed monetary policy was supportive of expansion, but he correctly pointed out that the Fed could not create jobs or clean up the dismal housing situation. He bluntly suggested that the recent budget and debt-ceiling debacle damaged consumer and business confidence and posed a downside risk. In the short run the burden was on Congress and the Administration to craft proactive fiscal policies to deal with the jobs issues and to clean up the excess supply of housing that were holding back the expansion.

Perhaps the most important part of the speech, however, was his observation that the quality of economic policy making would significantly impact the nation’s longer-run growth prospects. He implied that changes were needed; and he made concrete, broad-based suggestions for how to deal with the country’s fiscal and budget issues. In particular, he laid out what amounted to a two-stage process for getting the government’s financial spiral, which was driven by our aging population and rising health-care costs, under control.

The first task should be to put in place a credible plan for bringing expenditures and revenues into balance, establishing a more effective process for setting budget goals and ensuring they are carried out. The second step would be the difficult process of balancing the hard tradeoffs among competing choices that a credible budget process would require. This step would also require Congress to make sure that the public not only understood and bought into the budget control plan but also accepted the tradeoffs that had to be made to meet the plan’s goals.

Chairman Bernanke has clearly and correctly put his finger on the budget issues, how fiscal policy choices would determine the longer-term growth prospects for the economy, and what is needed to address those problems. The responsibility belongs to Congress, and time is short to put our house in order.

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Bob Eisenbeis is Cumberland’s Chief Monetary Economist. Prior to joining Cumberland Advisors he was the Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. Bob is presently a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. His bio is found at www.cumber.com. He may be reached at Bob.Eisenbeis@cumber.com.