Goldman's Take On Bernanke's "NEW QE" Speech

While it appears to us that Bernanke's message was loud and clear, there are those who need validation and peer-confirmation. Such as that from the firm whose alumni run the Fed, namely Goldman Sachs. Below is Jan Hatzius' take on the "surprising" Chairman speech which essentially said QE can and will come at any time there is a downtick in the market, masked by the unemployment rate rising to its fair value, as estimated by Gallup, somewhere around 9%.

From Goldman Sachs:

BOTTOM LINE: Fed Chairman Bernanke argued that the outperformance of labor market indicators recently may reflect a “catch-up” from unusual weakness in jobs during the recession. By implication, continued declines in unemployment will require faster GDP growth in the future. He also continued to argue that most of the increase in long-term unemployment is cyclical rather than structural in nature. Chairman Bernanke’s read on the state of the labor market was consistent with an accommodative stance for monetary policy—though he did not directly call for additional easing.


1.    Federal Reserve Chairman Ben Bernanke spoke on recent labor market developments before the annual meeting of the National Association for Business Economics (NABE) today. His comments focused on two aspects of the current debate on the labor market: (1) the outperformance of labor market data relative to GDP growth; and (2) how much of the increase in long-term unemployment reflects cyclical rather than structural factors.

2.    Chairman Bernanke discussed three alternative explanations for the better performance of labor market indicators recently. First, the surprisingly large drop in the unemployment rate may reflect statistical noise, and that GDP could be revised higher in the future. However, he said that there is no specific evidence to support this conclusion at this point, and in fact Gross Domestic Income (GDI)—an alternative measure of aggregate activity—was weaker than GDP over the last year. Second, the decline in the unemployment rate could be overstating the improvement in the labor market, as the drop partly reflects potential workers exiting the labor force. However, Chairman Bernanke argues that the decline in broader measures of labor underutilization (he cites the BLS’s U-5 measure) casts doubt on this explanation. Third, the large decline in the unemployment might reflect “a catch-up from outsized job losses during and just after the recession”. Chairman Bernanke ultimately finds this argument most compelling, and presents some simple supporting evidence.

3.    The chairman’s comments on the recent decline in the unemployment thus cut two ways. On the one hand, the drop in the unemployment rate is likely a real and encouraging development. On the other hand, because the outperformance compared to GDP likely reflects a catch-up from past weakness then, in Chairman Bernanke’s words, “further improvements in unemployment will likely require faster economic growth than we experienced during the past year”.

4.    The second portion of the Chairman’s speech focused on whether the increase in long-term unemployment reflected cyclical or structural factors. Consistent with his existing views, Chairman Bernanke argued that elevated structural unemployment is mostly a cyclical phenomenon, and that structural factors can explain only a small (and possibly temporary) part of the increase.

5.    On monetary policy, the Chairman said that faster growth—perhaps needed to see further declines in unemployment—“can be supported by continued accommodative policies”. He also argued that because the increase in long-term unemployment was primarily cyclical, “then accommodative policies to support the economic recovery will help address this problem as well”. These statements were not necessarily calls for additional easing, but they clearly supported the Fed’s current accommodative stance.