Stephen Foley: The Fed doesn't have a patent on stimulus


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The Independent Online

US Outlook: Ben Bernanke's speech in Jackson Hole could be summed up this way: It's not all about me, you know.

It was rather a bold thing to say, given that the eyes of just about every trader, investor and economist was on him at that moment. The Federal Reserve chairman has already lengthened the time horizon for zero interest rates, and markets wanted him to lengthen the duration of the bonds the Fed is buying, so as to push longer-term interest rates still lower, or, better still, to signal a whole new round of quantitative easing.

In the end, the only thing Mr Bernanke extended was the duration of the next Fed meeting, from one to two days, the better to examine all its options for further stimulus, should there still be no sign of an economic pick-up.

His real aim with the speech was to redirect the focus from the Fed to the other branches of government where policymaking might have a more significant effect. The central bank's fuel is not spent. It has a range of monetary tools still available to boost the anaemic recovery, but, as Mr Bernanke pointed out, there are now structural issues holding back the economy. Chief is the housing market, where foreclosures are pushing prices lower again and millions of homeowners are underwater on their mortgages.

Not only does the slack in the housing market mean the usual transmission route for monetary policy is broken – you can have interest rates as low as you like, but few banks will lend and few borrowers will buy if they believe house prices are likely to crumble further – but it also makes long-term unemployment that much harder to tackle, for two reasons: the residential construction industry remains moribund, and unemployed homeowners who might move in search of work cannot do so.

President Barack Obama has promised to unveil a jobs plan when politicians return to work next month. Actually, the best jobs plan would be a mortgage relief plan.