Money managers respond to Bernanke's speech

Ben Bernanke
Ben Bernanke

A new large-scale asset-purchase program from the Federal Reserve seems more likely following remarks Friday by Chairman Ben S. Bernanke at an economic symposium in Jackson Hole, Wyo.

“The Federal Reserve will provide additional policy accommodations as needed,” Mr. Bernanke concluded in remarks that singled out the stagnant labor market as “a grave concern” in an economic situation “that is far from satisfactory.”

“The speech definitely made a case” for more action by the Fed, said Michael Dueker, chief economist for Russell Investments, in an interview. “It's been very harmful to have the unemployment rate so high.”

Options available to the Fed include a third round of quantitative easing, extending low interest rates beyond their current 2014 range, and another round of asset purchases known as Operation Twist.

“I think QE is an impressive tool,” Mr. Dueker said. “I considered the second round a resounding success because it caused long-term interest rates to rise; even the first round helped end the recession earlier than most people thought.”

“Barring significant change, this is setting the table for more easing,“ agreed Jason Brady, fixed-income portfolio manager and managing director of Thornburg Investment Management, in an interview.

Analysts expect the next round of asset purchases to include mortgage-backed securities, to avoid criticism that recent purchases of U.S. Treasuries have influenced that market too heavily.

Mr. Bernanke said there is “substantial evidence” that asset purchases have lowered longer-term yields and eased financial conditions overall. In addition, “the odds are strong” that such purchases “will make money for the taxpayers, reducing the federal deficit,” he added.

Minutes from the last meeting of the Federal Open Market Committee July 31-Aug. 1 showed many FOMC members supporting further action, but agreeing to wait at least until the next meeting on Sept. 12-13. Fed watchers don't expect changes until after the November presidential elections, and even then they have muted expectations.

“The Fed doing this does not change my outlook tremendously,” Mr. Brady said. “We're basically continuing to invest based on bottom-up stuff and to just try to make good picks on assets.”

Still, Mr. Brady said, “having a window into what he and the committee think is valuable for many reasons. It seems that they're less worried about inflation.”