Prof Siegel says Bernanke's comments on dovish side

In an interview to CNBC-TV18, Jeremy J Siegel, professor of finance at The Wharton School, University Of Pennsylvania, gave his views on Fed chairman Ben Bernanke's comments and the road ahead.

Below is an edited transcript of Siegel's interview on CNBC-TV18. Q: What did you make of the Fed chairman said today?
A: Some people were initially disappointed because he didn’t pull the trigger right then and there and saying "this is the way we have to go”. But if you know Bernanke, that would have been a very unreasonable expectation. He has to be very careful not to front run the FOMC. What I mean that pre-judge the September 13 meeting and make conclusions before he airs them in the committee. So, given that I thought it was on the dovish side, on the side that implied that he is definitely ready to take more action.
It is not at all a slam-dunk and we still have two weeks of data coming between now and then. So, the door is definitely open and I think particularly when he talked about the fact that he did not believes that the unemployment rate was high, was structural. It means that he didn’t think there was enough demand. And that is something that he believes the Federal Reserve can partly correct.
I thought those statements saying there are millions unemployed that that are looking for further action and that might be worthwhile as a statement where his deep down sentiments lie. Q: You said the door is wide open. The question is when will we see a third round of quantitative easing walk through that door? Any sense on when you expect the Fed or what data it will take for the Fed to respond with a third round?
A: My feeling is that it is very close. Given the data we have so far, if the meeting was held today, there would not be a third round. I would say that just over 50%, there would be an extension to mid-2015 in the guidance of the low Fed fund rates, but I think the employment report that comes out a week from today is going to be very important. If that report falls well short as well as the other manufacturing data that comes in and the jobless claims other high frequency data, I think the probability tips in favour of it to 60-70%.
There is one more meeting as you know after this one in October, but there is a big question of what the presidential election just a few weeks after that – whether they would be reluctant to take any action that might be interpreted one way or the other as the political action. So, it would be the September 7, meeting and Bernanke himself as he is not fully convinced, he needs to see the data coming in.
I do think some action will be taken, but QE3 probably not. Let me mention that the last 2 or 3 weeks particularly in the housing market, the strength in the housing market as embryonic as it is. It is a very hopeful sign for the eventual recovery of the US economy and if he (Bernanke) believes that that’s already started, he might not need to have another round of buying of mortgage-backed securities and other treasuries to bring the rate down. He might have think that we got that fire started and it is just beginning to burn. So, again, he needs to look at more data. It is very close and my feeling is still slightly against the QE3 on the September meeting. Q: So for instance if the ECB despite all its internal debate does come around to finding some way to step in and buy further bonds or maybe even an extension of its SMP programme. Do you think that could have a substantial impact on how the Fed looks at its own next monetary easing move?
A: Yes, Europe is clearly a threat to demand. We export to Europe and anything that worsens – the financial or economic conditions there is a cause for concern over here. I am not sure whether the specific actions by the ECB – save one and that was the one that occurred just a month or two ago when they lowered their deposit rate down to zero. Now I was disappointed, Bernanke did not refer that in his Jackson Hole speech.
I am particularly in favour of going down to zero or maybe even using the money they save as a subsidy on the loan side of the portfolio. He did not mentioned it, but then when I have reflected back on today’s talk he was reviewing the past actions and that wasn’t one of those. So, I am not sure that that’s been totally ruled out, but that option has not been used. I don’t think that the bond buying expect as it eases the fears on the interest rate side is going to have a great impact on what type of that policy is going to be pursued. Q: To go back to the timing. There are those that believe that Mr. Bernanke might not take any action till the presidential elections in the US are done and dusted in November or else his actions might seem to be political. Do you believe that that could be the case because you have already laid down the case for a September action?
A: Again, I think there would be one more – he has one more meeting in October and that one would definitely be used. So if you say he has a buffer of one meeting, he could say I am not taking action right before the election. The truth of the matter is it is very hard to know how this would play out in favour or against any Obama or Romney if he does move or not. If he moves on QE and that spurs up the stock market some say that that might be to Obama’s credit because people will be feeling more optimistic in November. I think there is already some discounting of that in the current stocks. So, I am not too sure of whether there will be a big increase and I still think the unemployment rate and the number of people unemployed is going to be more important for the American psyche come November then whether there is a little bit of a push on stocks, on QE and by the way if the push on stocks and QE can easily be offset on the negative side by the push up in oil prices, which is going to raise gasoline prices. So, it might make stockholders a little bit happier. It will make US motorist a little less happy. It is very hard to see how that would come out, plus or minus for either candidate. Q: The effectiveness of a potential third round of quantitative easing. The Fed chairman said today based on the research that the Fed will access that its large scale purchases have significantly lowered long-term treasury yields. Really, how effective do you think the third round is going to be outside of cheering the markets maybe?
A: You are perfectly right to ask that question. We have already pushed it down so much, going the treasury - going from 3% down to 1% and 3.25% is already a bigger mull. How much further do we need? Mortgage rates are already at all-time lows and we have got the short rates lowered. So, it is only a question of these long rates. So, there is a legitimate question on that side. One can also say that rates have backed up a little bit from the 10 year, from the low of 139. I think now it is at 158. So if we could get it back in the 130s that’s 20 basis points. In Addition, Bernanke mentioned that it’s not just the rates it is the amount of securities that are held and if the Fed can make the situation more liquid by putting more reserves out there that might cause a rebalance in proportions that might include some risky assets like stocks and loans that might move money in that direction.