Some "bold" conclusions from Goldman's Jan Hatzius
1. Fed Chairman Bernanke delivered a balanced assessment of the policy outlook, saying that the economy could evolve in a way that would “warrant a move toward less-accommodative policy”, but that persistent weakness in activity and renewed deflationary risks would “imply a need for additional policy support”. In contrast to our expectations, the prepared remarks included a list of potential easing options—communication changes, changes in the interest paid on reserves, and security purchases. We see this as an upgrade of the seriousness of the easing discussion on the committee, and therefore interpret the speech as a moderate dovish surprise (the easing options were already discussed in the last post-FOMC meeting press conference). We believe the probability of easing over the next 6-9 months is higher than the probability of tightening.
2. On the outlook his remarks were in line with our expectations. He noted moderate growth in the recovery to date, held back by the household sector in particular. Chairman Bernanke said that the latest employment report attested to the weakness in the labor market. As in other recent remarks, he continued to point out that some factors holding back growth will likely prove temporary, and that the committee still expects an acceleration in the second half.
3. His remarks also included a discussion of the efficacy of QE2. He said that the FOMC “did not expect it to be a panacea for the country’s economic problems”, but that the program had the effect of “reducing the risk of deflation and shoring up economic activity”. He added that $600bn in Treasury purchases was likely equivalent to a funds rate cut of 40-120bp (our own estimates are at the lower end of this range).
4. There were no prepared remarks on the debt ceiling, but it is now coming up in the Q&A.