Ben Bernanke, chairman of the Federal Reserve, probably does not write his speeches long in advance. If he does, he must be tearing up the early drafts of his speech for the Jackson Hole meeting of central bankers this Friday. Topsy-turvy markets reflect how economic expectations have been turned upside down in the past few months – and with them, the considerations facing policymakers.
The will-he-will-he-not question on everybody’s mind is whether Mr Bernanke will repeat his 2010 trick of signalling a new round of asset purchases – quantitative easing 3 – by the Fed. On the logic by which Mr Bernanke justified earlier bouts of QE, the abrupt slowdown of the last six months should be a good occasion for doing more. The Fed believes the earlier assets purchases worked, insofar as they lowered long-term interest rates.
But it is not clear how much this did for the recovery or to what extent more QE can stop the economy from stalling. Long-term interest rates are already very low. Lowering them further will mostly benefit those already accessing credit – large corporations and mortgaged households. These are not showing any sign of wanting to spend more: households are busy deleveraging, and companies are happy to hoard their cash.