US Federal Reserve Keeps QE Carrot Dangling

Federal Reserve Chairman Ben Bernanke said he would not rule out further bond purchases to boost growth and reduce unemployment, which he called a “grave concern,” admitting that progress reducing unemployment had been too slow. He also added that the U.S. economy faced “daunting” challenges, but stopped short of providing a clear signal of further monetary policy easing.

Bernanke said the central bank would act as needed to strengthen the recovery but he also said it had to weigh the costs as well as the benefits of more monetary stimulus, although he hinted the costs may be worthwhile. Bernanke downplayed the potential risks from the Fed’s unconventional policies and argued that the asset purchases had been quite effective at boosting economic growth and fostering job creation. “The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant,” Bernanke said.

Federal Reserve Awaits More Data Before Taking Really Big Action:
It would now be two weeks before Bernanke leads a meeting of the FOMC – Federal Open Market Committee to decide whether an expansion of the Fed’s record stimulus is needed to spur growth. Two rounds of large-scale asset purchases totaling $2.3 trillion have so far failed to reduce the jobless rate below 8% more than three years into the recovery.

Bernanke said, “It is important to achieve further progress, particularly in the labor market.” He also added that, “Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time...The Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” The Fed Chairman said long periods of high unemployment produce “enormous suffering and waste of human talent” and also risk causing “structural damage on our economy that could last for many years.”

The Federal Reserve Chairman concluded his speech by saying “the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” There was a somewhat weaker hint of policy easing than the minutes of the Fed’s last policy meeting had delivered.

At that meeting, many members judged that “additional monetary accommodation would likely be warranted fairly soon” unless the economy showed substantial strengthening. Bernanke, however, made clear he was not satisfied with the economy’s progress.

Cooling growth leaves the world’s biggest economy more vulnerable to what Bernanke has called “two main sources of risk” — the debt crisis in Europe and the so-called fiscal cliff in the U.S., the $600 billion of tax increases and spending cuts that will take effect automatically at the end of the year unless Congress acts.

hile Eric Rosengren, president of the Federal Reserve Bank of Boston, and Charles Evans, head of the Chicago Fed, have called for additional stimulus since the last FOMC meeting, St. Louis Fed President James Bullard said in a Bloomberg Television interview today that he “would like to see some more data before taking really big action.” FOMC meets on September 12-13.

Gold Rallies Up On Federal Reserve Chairman Bernanke’s Speech:
Comex Gold futures prices climbed from their early dips for the day and rallied sharply following the much-anticipated speech by Federal Reserve Chairman Ben Bernanke. He certainly seems to have left the door open again as usual, for a fresh round of Quantitative Easing, possibly to be announced at the September 12 – 13 FOMC meeting. MCX Gold October contracts shot up to Rs. 31098, a new record high and Comex Gold shot up close to $1683 from the day’s low of $1647.

Silver, too, reversed its declines as expected, mostly on shifting from September short positions to longs in December contracts. Further gains and upsides in gold and silver seem pretty sure although vulnerable to a sharp downside correction first, especially more so in silver.

Indian monsoon-season rains have seem to have picked up, though a bit late, thus brightening prospects for physical Gold demand in India during the festive and wedding season. India currently has a 12% rain shortfall so far, but better than 19% in first week of August and drought fears have significantly receded. Indian Economy expanded 5.5% in the April-June quarter as against expectations of 5.2%. Comex Gold open interest has increased to around 10% in the last 10 sessions at 423,982 on Wednesday compared with 386,055 on August 15. An exceptional rise of 9,957 was seen on 28 Aug and rise of 12,028 on 21 August in Gold Futures Open Interest on Comex.