This is the second in a series of three notes about US economic policy. On Thursday President Obama will address a Joint Session of Congress about economic policy. Although he will be in competition with the opening game of the National Football League season, make no mistake, this is an important and unusual event.
US President, Barack Obama
In Jackson Hole Ben Bernanke stuck to the agenda that he originally set out in 2002. No new money was spent or created and he gave markets something to look forward to with an extended two day Fed meeting on 20th and 21st September. These meetings are normally only for one day and so why meet for two days if there is nothing to announce? The market view was that it is better to travel than arrive and at least it made a change from the almost daily grind of disappointing economic statistics. There was, however, a very slick buck pass. He made it clear that monetary policy on its own (under the control of the Federal Reserve) would not be enough to sustain growth. The clear message was “over to you Mr President” to marshal the resources of the US government.
Joint Sessions of Congress are relatively unusual. The stakes are high both politically and economically. Politically this could be Obama’s last chance to set the economics agenda for the 2012 election campaign. On the fiscal front his options are limited by the profound differences of opinion between Republicans and Democrats about both taxation and spending. The focus will, therefore, be on employment, but it is also possible that housing could be on the agenda. Both issues have the potential to win votes.
Left to its own devices the US economy is strong enough to be self-righting. Debts will be paid off or defaulted on, companies that over indulged in the credit bubble will be restructured and people will relocate or learn new skills in order to find jobs. All of this will take time and so the temptation will be to be more radical in order to jump start the recovery in time for next year’s election. This is the Presidents dilemma.
If his plans are judged to be insignificant or just more words then markets will return to the reality of a slowing economy and come under renewed pressure. If he is too radical then he runs the risk of scaring investors. In this event the dollar is likely to weaken.
Although investors will need to listen very carefully because the risk of policy error is high, I suspect that his words will be more radical than the actual solutions put forward and that he will do just enough to be able to pass the buck back to Bernanke for the Fed meeting in a couple of weeks time. A Goldilocks speech is needed, not too hot and not too cold.
