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If you wanted a clear picture of Federal Reserve strategy from the Ben Bernanke testimony to Congress this week, you were disappointed.
This week’s Bernanke testimony highlighted the mixed signals Bernanke has been sending to markets – part of the reason Money Morning Chief Investment Strategist Keith Fitz-Gerald has said Bernanke is engaging in “monetary drunk driving” and is “jerking the wheel back and forth all over the road.”
That’s why two Bens showed up at his final Humphrey-Hawkins appearance before Congress: Accommodative Ben and Tightening Ben.
Bernanke said the $85 billion a month bond purchase plan would be slowed later this year if the U.S. economy stayed on its present course.
But he also told Congress the Fed was not backing away from its very easy monetary policy. He said “a highly accommodative monetary policy will remain appropriate for the foreseeable future.”
Wall Street traders though appeared to be calmed by Bernanke’s testimony. They enjoyed the tune Accommodative Ben was singing while tuning out anything that Tightening Ben said.
What Bernanke Said to Congress
In case you missed the whole Bernanke testimony, here are snippets from what Bernanke said to Congress.
Tightening Ben said, “On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly.”
Translation: The bond buying could be tapered beginning later this year and actually end in the middle of next year.
Accommodative Ben said, “On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward two percent, or if financial conditions – which have tightened recently (Treasury bond yields higher) – were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer.”
Translation: If the U.S. economy does not improve to the level the Fed thinks it should be performing, bond purchases will be maintained indefinitely.
What Wall Street Loved About the Bernanke Testimony…
Some of Bernanke’s strongest language came regarding the Federal Reserve’s key target: unemployment.
He said “the unemployment rate remains well above its longer-run normal level and rates of underemployment and long-term unemployment are still much too high.”
Translation: If the unemployment rate does not drop to the 6.5% level we want and soon, the Fed may even increase its bond purchasing program.
This remark on unemployment no doubt caused Wall Street bankers to raise a glass in toast to the Federal Reserve chairman.
The man who saved them from the brink of disaster may bring them even more riches. Remember that most of the money goes to those who are closest to the point where the money is being created – the Federal Reserve.
And no one is closer to the Fed than Wall Street. Look at their latest quarterly reports: Citigroup Inc. (NYSE: C) had $4.2 billion in second quarter net income, Goldman Sachs Group Inc. (NYSE: GS) reported second quarter net income of $1.93 billion, Bank of America Corp. (NYSE: BAC) reported $4 billion in second quarter net income, Morgan Stanley (NYSE: MS) reported second quarter net income of $980 million, and JPMorgan Chase & Co. (NYSE: JPM) came in with second quarter net income of $6.5 billion.
Not bad. . .and with the promise of more from Accommodative Ben.
After all, he still denies he is creating money.
When asked by a Congressman “Are you printing money?”, Accommodative Ben said “Not literally.”
So, what’s ahead? Investors should look for more of the same from the Fed.
In his testimony, Accommodative Ben said, “If we were to tighten policy, the economy would tank.”
Yes, the economy would be hurt. But the tanking likely would occur on Wall Street, which would incur the brunt of the effects of higher interest rates.
Money Morning’s Fitz-Gerald hit the nail on the head when he said “the meme ‘as long as things are bad, the markets are good’ continues.”
Is the current monetary policy the correct one for the economy, not Wall Street?
No. As Fitz-Gerald has said before, these policies don’t fix problems.
“You don’t throw cheap money at markets and a financial crisis that was caused by too much money to begin with. Nor do you remove the free hand of risk from the markets without repercussion,” he said.
“The bet that Bernanke and other central bankers made reeked of desperation at the time they made it and, unfortunately, it still reeks of desperation now,” said Fitz-Gerald in this Q&A on the Fed and the U.S. economy.
In fact, Ben seems to have missed seeing the coming of most of the major financial events of his term as chairman.
These events include: the housing and subprime mortgage crisis, derivatives’ role in the 2008 financial crisis, and the troubles at Fannie Mae and Freddie Mac.
And add this quote to the collection: “The amount of U.S. student debt is large, but not particularly likely to cause macro-economic instability.”
Perhaps Bernanke’s acumen as Fed chairman can be best summed up in his final words to Congress on Wednesday, “I don’t know.”
For more Bernanke gems, don’t miss 7 Reasons Not to Trust the Bernanke Testimony to Congress
- Money Morning:
Bernanke Testimony Sends Mixed Signals on QE3
- Financial Times:
Bernanke Vows No Retreat on Easing Policy
- Zero Hedge:
Are You Printing Money? Not Literally
- The Daily Beast:
Federal Reserve Chairman Ben Bernanke Testimony Further Calms Markets