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Ben Bernanke speech was disappointment for markets


Ben Bernanke speech was disappointment for markets
Federal Reserve Chairman, Ben Bernanke, gave a pep talk to booster the sentiments of economy. Meanwhile he down played all concerns about inflation. Although the Chairman did not offer any new insight on the measures that the Federal Reserve may consider during its meet on September 20-21.

Sharing his thought at the podium of Economic Club of Minnesota Bernanke assured, "The Federal Reserve will do all it can to help restore high rates of growth and employment in a context of price stability."

To allay fears on inflation that his colleagues have, the Chairman said, "We see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy".

There was not much positive effect of this pop up talk as US stocks fell, since the investors were not able to assess the possible action that Federal Reserve nat take at the when Federal Open Market Committee meets. The dollar gained against euro, meanwhile Treasury debt prices went up too.

The seriousness of the deterioration of the US economy can be gauged from the fact that in six weeks the political debate in the power corridors of Washington has shifted from 'how to cut US debt' to 'urgency on lowering unemployment'.

Federal Reserve policy so far

The Fed took the benchmark rates to near zero to pull the economy out of a sharp recession. It bought USD 2.3 trillion worth of longer-term securities. This was done in two installments as part of Quantitative Easing-2 (QE2), the process was completed by June 2011.

As the results were not as per the expectation of the Federal Reserve, the Fed on August 9, 2011 promised to hold the rates at the same levels till mid-2013, a decision that drew three dissents on the FOMC.



Analysts expect that the fed will shift its USD 2.8 trillion balance sheet to holdings of more long-term securities. They consider that the fed in order to keep the interest rate low it will buy long-term securities and keep the interest rate low so that activity in the mortgage refinancing and other activities that depends on longer-term interest rates start picking up.

For this reason, it well sell short-term securities and buy long-term bonds, as well as simply replacing maturing securities with longer-dated issues.

VIEW: The effective problem of the economy is that it is over-leveraged and it Was built on property prices. Now the property prices all over the United States of America has fallen, there has been a major loss of wealth.

The important and the tough part the the government needs to do is write-down its losses, increase taxes. The other important part is to change policy in a way that it gives benefit to hire local and reduces over all joblessness in the country.

These measures need to be taken by the Congress and the president, the Federal Reserve is out of policy options. It cannot save the day all it can do is kick the can few months forward. The time has come for political masters to take the tough decisions.

Story first published: Friday, September 9, 2011, 12:56 [IST]
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