In Bernanke We Trust?

Ben Bernanke, head of the Federal Reserve, is credited by many people for lifting America and much of the rest of the world out of the financial crisis of 2008 and early 2009.

He spoke and answered questions in front of the Senate Banking Committee yesterday, and while he was speaking, the stock market rapidly sold off.

All Bernanke said was that the economy is “unusually uncertain”, which is something that anyone with a high school education already knows.It is hard to tell which of two statements that Bernanke made spooked the market more. He said that the Federal Reserve still has dry powder to help if the economy weakens further. He also said there was no need to use it now, an expression of confidence that the uneven improvement in GDP will continue.

The Fed could ease again or buy more securities in the open market. It also might decide to not let maturing securities run off the central bank’s balance sheet. These actions were effective in the past and should be so in the future.

Perhaps what bothered the markets is that the Fed is even thinking about another intervention. It is a sign that the confidence that Bernanke and most other Federal Reserve Governors express in public is a facade. Potential Governors being examined by Congress for confirmation have also been upbeat, which may simply be a way to ingratiate themselves to legislators who are worried about another slowing of the economy and what it might do to their election prospects.

The markets should have held their own yesterday, or perhaps rallied. The head of the American central bank argued that he could pull the economy from a period of stagnation again, and more importantly he said that such an action is not necessary now. And, “now” is the foundation of  what will happen later this year or next.

Douglas A. McIntyre