Wednesday, April 27, 2011

Federal Reserve Chairman Bernanke's Top 10 Comments

Today, Federal Reserve Chairman Ben Bernanke met with the media today and answered several questions. The main points of his speech and responses were the following:

  1. He believes that oil and commodity price inflation that we are currently experiencing is "transitory." In other words, he expects it to peak and turn around and settle back down.
  2. He said that the FOMC has a dual mandate. One is to promote economic growth and the other is to keep inflation low.
  3. He reiterated that he was not as concerned with short term inflation as he was with medium term and longer term inflation.
  4. He said basically that when conditions warrant, he fully expects to act to keep inflation in check by raising interest rates.
  5. Further, he did not believe the impact of the Federal Reserve stopping their Quantitative Easing (QE2) strategy of buying long term securities from the market would have much of an impact on the financial markets. His reasoning was that the fact that they are ending QE2 is well known and generally already factored into the financial markets.
  6. He felt that the efforts that have been undertaken to date since the crisis began, have had a positive effect on the unemployment rate decline. However, he noted that the Federal Reserve is not the be all and end all to fixing unemployment.
  7. He further stated that the policy of the Fed was for a strong dollar and a strong U.S. economy which he believes is good for the world economy.
  8. Chairman Bernanke expressed his support for our leaders in Congress and the President's Administration to work together and get our fiscal debt under control in the long term. He said it was a long term problem and it will take cooperation from both groups to achieve consensus.
  9. There were other issues discussed such as how the Japanese tragedy might affect our economy and the current problems in the Middle East and North Africa. He assured us that the Fed was on top of these issues and in discussions with other leaders.
  10. He said that although S&P putting U.S. Government debt on Negative Credit Watch was indeed historic, he felt it was not a surprise. He again reiterated the need at some point to get this debt problem under control and he mentioned that it was unsustainable.
I think Chairman Ben Bernanke did a good job with this historic press conference today. However, I am not certain that he truly knows what will happen when QE2 is stopped. He did say that they would reinvest maturing securities into new securities. This means that effectively, the $600 Billion that they have put on the Fed balance sheet would stay at $600 Billion. When they see the economic recovery that they are anticipating, then they will slowly allow maturing securities to fall off the Fed balance sheet. So, his view is that they will still be buying long term securities, but only when the ones currently in their portfolio mature. Therefore, I believe this is why he holds the view that any market impact after QE2 ends will not be a major shock to the market. The truth is that this is an educated guess on his part, since we have never had a QE2 like this one before. Let's hope he is right. I suspect we will see a blimp up in June when QE2 expires, but when the short speculators do not get want they want right away, they usually capitulate fairly quickly.

The Fed was able to do something similar to what they are doing today back in the decade of the 1940's. They can keep interest rates low for an extended period of time. I think we are good until at least the 4th quarter of this year on the discount rate.

Almost all the bullets in the Fed's gun have been used. We are still creeping along with this recovery. I reason that tax reform is the biggest thing that should be done to help this economy grow at a faster pace. However, it does not appear that this will happen as long as President Obama is in office. He is more intent on raising taxes. One thing is for sure, putting our faith in the politicians in Washington D.C. is a futile effort. We the people have to create the new jobs and grow this economy in spite of what the people in Washington D.C. do "for us".