September 2, 2012
You'd never think of Fed-speak as the warm fuzzies, but that's the way investors took Federal Reserve Chairman Ben Bernanke's speech Friday at Jackson Hole, Wyo.
Bernanke didn't say when he might stimulate the economy again, or how he might do it, but in the couched terms of a Fed master, he said he thought the economy needs more help and that the Federal Reserve has the ability to give it.
Bernanke called the current economy "far from satisfactory," and said "the stagnation of the labor market in particular is a grave concern."
To regular Americans, focused on the long painful stretch of unemployment since 2008, such a gloomy view might seem like reason to worry and reason to avoid stocks. But professional investors are different. The pros live by the mantra: "Don't fight the Fed."
So if the economy sounds bad enough to get Bernanke to add stimulation, investors go with the flow, buying stocks as the Fed makes its moves. Presumably, if the Fed is successful stimulating growth, corporate profits should rise and make stocks more valuable for the investors who bought them at a dicey time.
Consequently, on Friday the Dow Jones industrial average rose 90 points as many an analyst concluded, as did Paul Dales, of Capital Economics: "The speech was a clear sign that the Fed is ready to provide more policy stimulus."
Further, for those who have been wondering if Bernanke realizes there is a downside to the manipulation the Federal Reserve has used since 2008 to stimulate growth with low interest rates, Bernanke acknowledged concerns such as: risking inflation, damaging how the markets function, starving savers of the interest they need and putting the Fed at risk of losing billions on the bonds they have purchased.
But he noted academic studies that found that the Fed's actions have lowered borrowing costs for companies and kept mortgage rates low. And his conclusion is being embraced by economists as a signal that more stimulus is coming.
He said: "Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodations as needed to promote economic recovery and sustained improvement in labor market conditions."
Now, with questions about Bernanke out of the way, attention has shifted to what the Federal Reserve's counterparts will do in Europe as the debt crisis and recession deepen. The European Central Bank meets Thursday and investors are hoping to hear bank President Mario Draghi embrace and describe a possible new bond purchase program aimed at making it easier for countries like Spain and Greece to borrow money at affordable rates. High rates lately have been a threat to their ability to operate.
Yet, there is controversy, as stronger European countries wonder if they want to be saddled with risks related to bonds for weaker countries. So Barclays analyst Philippe Gudin de Vallerin says he thinks "explicit details" are "quite unlikely."
What may become clearer in the next week is when the Federal Reserve will stimulate again. A key is unemployment. Watch Friday to see if the unemployment rate moves away from 8.3 percent.
If it stays there and job creation remains around 130,000 new jobs for the month, IHS Global Insight economist Paul Edelstein says more stimulus could come as early as the Fed's Sept. 12 meeting.
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