Misplaced Hopes for Further Fed Interventions

Speaking at the annual Jackson Hole retreat last Friday, Fed Chairman Ben Bernanke adopted his strongest characterization yet of weak economic and labor markets conditions. Describing the latter as a source of “grave concern,” he conceded that a protracted period of elevated unemployment could have long-lasting consequences for the structural health of the American economy.

Investors are listening closely for any subtle shifts in the Chairman’s signaling of the Fed’s next moves. But this focus is largely misplaced. While the near-term effects of monetary policy have costs and benefits for financial markets, they are not surmounting headwinds to hiring and business investment. At least in the present, the practical effectiveness of the Fed toolkit in supporting real economic activity is debatable.