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The Real Emergency Is That Gavyn Davies Thinks There Is No Emergency

Gavyn Davies:

Ben Bernanke at Jackson Hole: The markets have already assumed that a further monetary easing by the Fed is just around the corner, almost certainly to be announced at the next FOMC meeting on September 12-13. At the very least, this will probably involve an extension of the Fed’s guidance on “exceptionally low” levels for the federal funds rate from the end of 2014 at least to mid 2015. However, there is uncertainty…. The key question is whether Mr Bernanke will choose to clarify the ambiguities…. “Additional monetary accommodation” might mean a further expansion in the size of the balance sheet (QE3), or it might mean nothing more than an extension of the rate guidance into 2015. The words “fairly soon” might mean in September, or after the election. And the definition of a “substantial and sustainable” strengthening in the economy leaves a great deal of scope for different interpretations, though it is hard to maintain that such an improvement has already taken place.

It does seem clear that if Mr Bernanke wishes to shift monetary policy in a more expansionary direction, he certainly has the votes to do this….

He has also shown consideration for the views of the more hawkish “participants” at the FOMC, even thought they have no immediate clout as voters. These “participants” (unlike the voting “members”) expressed considerable concern in the latest FOMC minutes about the “costs” of unconventional monetary easing, including possible market disruption, exit problems, and possible effects on inflation expectations. Unlike his predecessor Alan Greenspan, the current chairman likes to operate in a collegial manner, and values unity on the policy committee. While he does not seem very worried about these “costs” himself, he is willing to respect the views of others, at least for as long as there is no immediate emergency developing in the economy or the financial system.

At present, there is no such emergency. According to yesterday’s revised data, real GDP grew below trend at 1.7 per cent in Q2, and most forecasters think that it is tracking at around 1.8-2.3 per cent in Q3…

If 2%/year real GDP growth and a 58.5% civilian adult employment-to-population ratio is not an emergency in the economy, what would an emergency in the economy be?