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.

Expansion Still at Risk

Contrasting lofty stock market valuations, Chairman Bernanke’s comments coincide with mixed indicators of real economic activity that warrant concern. Modest signs of improvement in the housing market are ultimately unimpressive in the context of historically low-cost mortgage rates. Hiring picked up slightly in July, but not by enough to keep unemployment counts from rising. Revised data that show GDP expanding by 1.7 percent in the second quarter confirm that businesses remain rather cautious in hiring and investing, and that income-constrained households are struggling to power their part of the expansion equation.

In the extreme, indicators of recession probability inched up slightly in July and early August. By Chandan Economics’ own metrics, the chance of recession over the next twelve months increased to 8 percent as of July. With leading indicators such as core capital goods orders pointing unambiguously lower, it is hardly surprising that monetary policy makers are debating the merits of further intervention.

Is Fed Intervention Making a Difference?

Dr. Bernanke has been a strong advocate for the Fed’s readiness to intervene, emphasizing the potential upside while downplaying the potential risks. This balance was captured in his statement that “… 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.”

Several analyses from the Boston Fed show meaningful contributions to prospective GDP from the Fed’s Treasury and mortgage bond purchases†. But across the range of empirical evaluations of the current crisis response, the practical findings are less consistent. Reflecting the mixed evidence, Atlanta Fed President Dennis Lockhart said last week that he is “… not highly confident in the ability of simply monetary action to jump-shift the economy onto a different track.” Chandan’s analysis tends to support Mr. Lockhart’s view. But absent a definitive measure of recent Fed policy effectiveness, creative options remain viable options, even if there is limited evidence of their real economic value.

†See Fuhrer and Olivei (2011) and Fuster and Willen (2010)