Analysis: Fed Can Still Help the Economy
This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.
"No Fed Plans To Provide More Support, Bernanke says," so said The New York Times. The article described Federal Reserve Chairman Ben Bernanke's semi-annual testimony before the Senate Finance Committee yesterday.
In his policy update, Bernanke said
that the "economic outlook remains unusually uncertain." While he tried
to assure lawmakers that the central bank remains prepared to act and
will remain flexible, Bernanke didn't elaborate, leaving investors
doubtful that additional economic stimulus would be forthcoming. Without
such a boost, some fear that the economy will sputter and potentially
fall back into contraction-or the so-called "double
dip".
With a good night's sleep, investors are rethinking their reaction to Bernanke's comments this morning, driving stock indexes higher. In fact, the Fed still has plenty of ammunition to stimulate the economy and Helicopter Ben is just the guy to do it. (This is a reference to Bernanke's famous 2002 speech, when he said that to fight deflation, "the U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost." He was referring to a statement made by economist Milton Friedman about using a "helicopter drop" of money into the economy to fight deflation.)
With interest rates at zero, some argue that the Fed is out of bullets. Really? Not to Helicopter Ben! To wit, the Fed can:
buy other government debt, which would lead to lower interest rates
delay selling $1.25T of mortgage-backed securities it owns
announce long-term intentions regarding short-term rates
raise the long-term inflation target
Don't count out Ben's ability to be creative. This was the guy that pulled out all the stops in the heat of the financial crisis and who has spent his career preparing to fight the bogey man called deflation. When Bernanke says that the Fed is prepared to act, perhaps we ought to trust that short of a helicopter, the Fed Chief will do everything he can to infuse the economy with money.
Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Prior to the launch of MoneyWatch, she was the Chief Investment Officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.