Ben's prepared remarks went off embargo at 10:00 am Eastern. The text (just the body, excluding appendices) had 4,549 words, 254 commas and 173 periods. It took Goldman 40 minutes to read it, write a 579 word response, proofread, get it through compliance, and shoot it to all clients. Now that's efficiency. The title? "Bernanke Makes Case for Effectiveness of Unconventional Easing" of course, even though the real shocker in the speech was that Bernanke for the first time as far as we recall admitted that the sentiment that QE is not working may result in a Catch 22 where every incremental and larger QE episode has diminishing returns (just as we have been warning for years).
Here is the full Goldman's pret-a-portersender response:
Bernanke Makes Case for Effectiveness of Unconventional Easing
Fed Chairman Bernanke's Jackson Hole speech makes the case for unconventional monetary easing--in particular, balance sheet and communication policies--as an effective tool, even if the "hurdle is higher" for the use of such policies. In a dovish conclusion, he notes the poor state of the labor market as a "grave concern".
MAIN POINTS:
1. Fed Chairman Bernanke's keynote speech at the annual Jackson Hole conference reviewed monetary policy during the crisis, described the methods of action of balance sheet tools and communication (guidance) policies, and reviewed the potential costs of asset purchases. In conclusion, Bernanke emphasized that unconventional easing can be an effective tool of monetary policy and highlighted the still-weak state of the US labor market as a "grave concern".
2. Bernanke began his speech with a discussion of policies during the crisis; while the details of what occurred here are well known, this section was noteworthy for a frank admission that given the "limited historical experience" with nontraditional monetary easing, policymakers "have been in the process of learning by doing".
3. Bernanke discussed the ways in which balance sheet policies can affect the economy--focusing on the imperfect substitutability of assets and the consequent ability for reductions in the supply of a given asset to affect its price/yield; he also noted the signaling effect of such policies and the potential for them to aid the functioning of distressed markets. He cited research showing that asset purchases lower Treasury, MBS, and corporate bond yields, and noted "a study using the Board's FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred", though with the caveat that "It is likely that the crisis and the recession have attenuated some of the normal transmission channels of monetary policy relative to what is assumed in the models". As for rate guidance, Bernanke defended the current forward guidance as "broadly consistent with prescriptions coming from a range of standard benchmarks" but went on to note its influence on market expectations and say that "a number of considerations also argue for planning to keep rates low for a longer time than implied by policy rules developed during more normal periods."
4. Bernanke reviewed the potential costs of nontraditional policy in more detail than previously. For asset purchases, these included 1) possible impairment of market functioning, 2) public/market concern about the Fed's "ability to exit smoothly from its accommodative policies", 3) risks to financial stability as lower rates push investors to search for yield in riskier assets, 4) financial losses for the Fed on its securities holdings if rates rise sharply. He summed up by saying "the hurdle for using nontraditional policies should be higher" but that "we should not rule out the further use of such policies if economic conditions warrant."
5. The speech concluded with the near-term outlook--held back in Bernanke's view by a slow recovery in housing, government fiscal drag, and financial market stress (particularly because of the Euro area crisis). The final note was dovish, with Bernanke emphasizing that "we must not lose sight of the daunting economic challenges that confront our nation" and professing "grave concern" with the weak labor market and the potential structural damage that could result from persistently high unemployment.