Goldman's Take On Bernanke's Speech: "No Surprises... Market Expects Easing Action On September 21"

BOTTOM LINE: Fed Chairman Bernanke’s speech to the Economics Club of Minnesota today contains no surprises and will do nothing to dispel market expectations of further easing action at the September FOMC meeting.

MAIN POINTS:
 
1.    Fed Chairman Bernanke’s speech to the Economics Club of Minnesota today will do nothing to dispel market expectations of further easing action at the September FOMC meeting. His description of current conditions and the economic outlook was broadly in line with other recent Fed communication—including the August FOMC statement and minutes, and his recent speech at the annual Jackson Hole conference. He said that the recovery has been “much less robust” than the Fed had hoped, and that the committee sees “greater downside risks to the economic outlook”. While he continued to say that the Fed expected stronger growth in the second half, he again pointed out that some of the causes of weakness in growth earlier in the year could be more persistent. On inflation, Bernanke noted that while headline inflation had picked up, inflation is expected to moderate as “transitory influences wane”. The Fed currently sees “little indication that the higher rate of inflation ... has become ingrained in the economy”.

2.    As at the Jackson Hole speech and earlier Congressional testimony, Bernanke again urged fiscal policymakers to consider “the fragility of the economic recovery” when returning the government's finances on a sustainable trajectory, adding that “in the absence of adequate demand from the private sector…a substantial fiscal consolidation in the shorter term could add to the headwinds facing economic growth and hiring.”

from Goldman's Jan Hatzius

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