Wednesday, March 28, 2012

Bernanke's Speech

Monday’s 1.6% increase followed a speech delivered in the morning by Fed Chairman Ben Bernanke before the National Association for Business Economics. It was a relatively technical discussion of recent developments in the labor market. The Fed Chairman concluded that while it is improving, there’s room for improvement. So Fed policy will remain accommodative, which was the main point I made in Monday’s Morning Briefing just before Bernanke confirmed my conclusion in his latest speech.

In his own words: “A wide range of indicators suggests that the job market has been improving, which is a welcome development indeed. Still, conditions remain far from normal, as shown, for example, by the high level of long-term unemployment and the fact that jobs and hours worked remain well below pre-crisis peaks, even without adjusting for growth in the labor force. Moreover, we cannot yet be sure that the recent pace of improvement in the labor market will be sustained.”

That is essentially the same message that FRBNY President Bill Dudley delivered in his speech on March 19 and that Professor Bernanke mentioned in passing during his GWU lecture on March 20. As I noted yesterday morning, the most important message for investors is that the Fed is in no rush to raise interest rates no matter how well the economy seems to be performing.

While the market was a bit wobbly last week, stock investors concluded on Monday that Mr. Bernanke is determined to lead them to Nirvana, where interest rates remain near zero even if the economy is growing robustly.

While there is some debate on whether the Fed Chairman implied in his speech that another round of quantitative easing is coming, I don’t think there was any ambiguity about his intention to keep the federal funds rate near zero even if the economy continues to improve. Here is what he said: “To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies. I also discussed long-term unemployment today, arguing that cyclical rather than structural factors are likely the primary source of its substantial increase during the recession. If this assessment is correct, then accommodative policies to support the economic recovery will help address this problem as well.”

The percentage of respondents agreeing that “jobs are hard to get” in the March Consumer Confidence survey rose to 41.0% from 38.6% in February. The jobs-hard-to-get response is highly correlated with the unemployment rate and suggests that the latter might not have continued to decline in March. We now have four regional business surveys for March covering the Fed districts around Dallas, New York City, Philadelphia, and Richmond. The average of the employment components of these four was little changed at last month’s most recent cyclical high.

BULLET POINTS FROM TODAY’S MORNING BRIEFING: (1) Sun-Tzu tells bulls to stay close to bears. (2) Blinder’s fiscal cliff. (3) Simpson-Bowles lite? (4) How lame will the lame ducks be? (5) Lots of popular loopholes. (6) Ryan’s Express on slow track unless Supremes kill ObamaCare. (7) When will stocks discount the cliff scenario? (8) Consumer stocks climbing every mountain. (9) Tech stocks still cheap. (10) The employment cliffhanger. (More for subscribers.)

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