Bernanke Says Fed Is Prepared To Take Further Action. Will It Matter?

In his semi-annual testimony on the economy and monetary policy in front of the Joint Economic Committee of Congress, Ben Bernanke told lawmakers that the FOMC is prepared to take further action to promote a stronger economy.

"The Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability," Bernanke said.

The Fed Chairman told the committee that the recent economic data points to the likelihood of more sluggish job growth ahead. “The incoming data suggest that other, more persistent factors also continue to restrain the pace of recovery. Consequently, the Federal Open Market Committee (FOMC) now expects a somewhat slower pace of economic growth over coming quarters than it did at the time of the June meeting, when Committee participants most recently submitted economic forecasts.”

Bernanke noted that the public has once again grown cautious in their spending patterns. He told the Congressional Committee, “Consumer behavior has both reflected and contributed to the slow pace of recovery. Households have been very cautious in their spending decisions, as declines in house prices and in the values of financial assets have reduced household wealth, and many families continue to struggle with high debt burdens or reduced access to credit.”

On the hot topic of jobs, Bernanke continued to paint a rather dismal picture. “Probably the most significant factor depressing consumer confidence, however, has been the poor performance of the job market. Over the summer, private payrolls rose by only about 100,000 jobs per month on average--half of the rate posted earlier in the year.1 Meanwhile, state and local governments have continued to shed jobs, as they have been doing for more than two years. With these weak gains in employment, the unemployment rate has held close to 9 percent since early this year. Moreover, recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead,” he said in his testimony.

However, the Fed Chairman appeared to also set the stage for more stimulative measures by the FOMC. If you will recall, part of the reason that another round of quantitative easing was ruled out recently was the fact that inflation has been at or near Fed target levels. Bernanke effectively said in Jackson Hole that the FOMC needed to see inflation expectations abate in order for more QE to be implemented.

This morning Bernanke appears to be laying the groundwork for more Fed intervention as he said that inflation has begun to moderate and that the inflation picture is “subdued” over the medium term outlook. Thus, analysts may argue that the stage is now set for another round of bond buying from the Fed.

We will note that ECB President Jean-Claude Trichet also commented today that inflation expectations appear to be diminishing when looking ahead to 2012.

Finally, Mr. Bernanke urged the Congressional Committee not to overdo it on short-term spending cuts. "A(n) important objective is to avoid fiscal actions that could impede the ongoing economic recovery," he said.

Stocks have moved up from the lows of the day as Bernanke began his testimony presumably on the hope that the Fed will lend a hand. The only problem here is that stocks and GDP growth are both now lower than they were when QE2 was announced. This leads many to believe that the Fed's actions are no longer as effective as they have been in the past.

So, with the stock market now officially in a Bear Market according to our definitions, the question is if the Fed can save the day or if nature will have to take its course in this cycle going forward.

Editor's Note: Please let us know what you think about the Fed's ability to bail out the market and the economy in the Comments Section below. 

 

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