Bernanke Testimony Sends Mixed Signals on QE3

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Call it Ben Bernanke's Alan Greenspan moment.

As his predecessor as Federal Reserve chairman had often done, Bernanke sent decidedly mixed and unclear signals today (Wednesday) in testimony before Congress.

The Bernanke testimony, in prepared remarks delivered to the House Financial Services Committee, provided nothing close to a definitive answer on whether the Fed would scale back quantitative easing in September.

Bernanke's testimony came about a month after he floated a trial balloon by saying at a press conference the Fed could begin scaling back QE this year and end it altogether by mid-2014. The markets sold off immediately after Bernanke's June comments but have since recovered.

On Wednesday, the central bank's chief told lawmakers, "Because our asset purchases depend on economic and financial developments, they are by no means on a preset course."

On the one hand, Bernanke testified Wednesday if economic conditions improved faster than expected, and inflation appeared to be rising toward the Fed's 2% goal, the $85 billion-a-month bond-purchase program could be tapered starting in September.

But if the employment outlook worsened and inflation didn't appear to be moving toward 2%, the asset purchases would continue on and on.

Not only that, Bernanke said that if necessary, the Fed would "increase the pace of asset purchases for a time, to promote a return to maximum employment in a context of price stability."

Title: Bernanke testimony
"Because our asset purchases depend on economic and financial developments, they are by no means on a preset course."

– Ben Bernanke

"Romper Room' is in Session"

So what to make of the Bernanke testimony?

Money Morning Chief Investment Strategist Keith Fitz-Gerald, never much of a fan of Bernanke or the Fed, minced no words Wednesday.

"'Romper Room' is in session: This is more evidence that Bernanke is making things up as he goes along," Fitz-Gerald said of the Bernanke testimony.

"There is no specificity here whatsoever. Anybody who runs a business would be fired for being so vague, yet the markets seem to be perfectly content to have the world's financial destiny hung on a complete lack of specifics."

Fitz-Gerald said dissension inside the Fed, revealed with the release of minutes from the June meeting, shows "at least a few people may be waking up to the possibility that the benefits of QE so far are not matching up to the costs. Inasmuch as that's dismaying, that's perhaps the silver lining here."

For now, Fitz-Gerald said, "the meme 'as long as things are bad, the markets are good' continues."

Money Morning Capital Wave Strategist Shah Gilani weighed in as well.

"Bernanke has torn the cover off Greenspan's old book," Gilani said.

Bernanke, Gilani said, had promised a more transparent Fed, but instead "he's gone opaque … In other words, cover, cover, cover, so screwy no one knows what you are saying. This [Bernanke testimony] means exactly what it says: 'We'll do what we are going to do; you'll see it when you see it.'"

Markets Relieved By Bernanke Testimony

The markets breathed a collective sigh of relief after the Bernanke testimony indicated the Fed doesn't necessarily plan a pullback of QE in September. The S&P 500, the Dow Jones and the Nasdaq were up slightly in afternoon trading Wednesday.

The Bernanke testimony included some jabs at Congress.

"The economic recovery has continued at a moderate pace in recent quarters despite the strong headwinds created by federal fiscal policy," he told the congressional committee.

And Bernanke said, "The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery."

Is he saying the Fed wants to enable more federal spending, which has spectacularly failed to energize the economy?

Bernanke pointed to gains in housing, with home prices, sales and residential construction up in the past year, buoyed by low mortgage rates and more confidence in the housing market.

The employment picture also has been improving, with the unemployment rate in June at 7.6%, about a half-percentage point lower than in the months before the current round of asset purchases began last September, but far above the Fed's target of 6.5%.

"Despite these gains, the jobs situation is far from satisfactory, as the unemployment rate remains well above its longer-run normal level and rates of underemployment and long-term unemployment remain much too high," Bernanke testified.

At the same time, inflation has been running below the Fed's target of 2%, he said.

Bernanke noted that participants in the June Federal Open Market Committee meeting projected economic growth would pick up in coming quarters toward the Fed's unemployment and inflation goals.

Most FOMC members, he said, also foresaw GDP growth improving in the second half of this year and reaching a rate of 2.9% to 3.6% in the final quarter of 2015

The Fed chairman also pointed to easing of financial stresses in Europe, improved budget situations in state and local governments and stronger balance sheets for businesses and households alike.

For now, though, it will be more of the same when it comes to Fed policy.

"With unemployment still high and declining only gradually, and with inflation running below the Committee's long-term objective, a highly accommodative monetary policy will remain appropriate for the foreseeable future," Bernanke said.

Gilani says such remarks lead to an inevitable conclusion:

"He talks about unemployment and economic metrics like housing trends, but reading between the lines, which is what he expects the people he cares about (bankers and market players) to get, the most important thing at this juncture for the Fed is, 'What are the markets doing?' and 'Let's not blow a hole in the whole wealth effect trickle-down shell game.'"


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  1. H. Craig Bradley | July 18, 2013

    If the markets and investor class are dependent on what Ben Bernanke says or what the FED does, then we are ALL in trouble !

  2. RePete | July 22, 2013

    And H. Craig, you forgot about the Federal govt. too. Just wait until the debt hits $20T. That will be the point where the world will give up on the dollar.

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