Bernanke Close To Vest
Federal Reserve Chairman Ben Bernanke fought off numerous queries from a serious, agenda-filled Senate Banking Committee and sent U.S. equity markets into a steep fall on Wednesday. Media coverage quickly picked up on Bernanke’s “unusually uncertain” capsulization of the economy and used this phrase to characterize the Fed’s position regarding the strength and direction of the U.S. economy.
Bernanke may have appeared uncertain about the economy’s direction, but he was steadfast in the Fed’s commitment to use all weapons at its disposal to prevent a double dip. Pressed by Senate members to detail the weapons in the Fed’s arsenal, Bernanke played his cards very close to the vest.
In essence, the chairman did not outline any possible details summarizing the Fed’s position saying, “We remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.”
Thus far, The Federal Reserve has held the line on near zero interest rates, implemented in December 2008, and on the purchase of troubled mortgage and bonds. The Fed has spent $1.5 trillion on the products since the recession began.
Despite his direct assertions that an economic downturn was unlikely, Bernanke’s testimony weighed heavily on Wall Street. The Dow Jones closed down 105 points on Wednesday. Strong corporate returns have neutralized a series of negative reports concerning employment, manufacturing and housing.
When pressed by the committee, Bernanke stuck to his script. The chairman said was considering all possibilities but that for the time being the main options remained the purchase of more mortgages and lowering the rate paid to banks to place excess reserves with the Fed.
Senate Republicans would like the Fed to halt the flow of red ink while Democrats favor more stimulus funding to solve unemployment. Bernanke was cool to both possibilities.
Euro Zone Worries
In his testimony, Bernanke added that problems in the euro zone had unnerved Wall Street and created the uncertainty in investment markets. Bernanke also cited the slow growth in the employment sector as problematic.
Overnight, the euro zone checked in with surprisingly positive economic news. A survey from Markit showed improved employment, progress in manufacturing and increased growth in the euro zone.
The Markit Purchasing Manager’s Index surveys 2000 varied businesses in the zone. The index rose to 56.0 in July, up from 55.5 in June. Analysts had projected a slight downward turn to 55.0. Manufacturing rose to a starling 56.5 from 55.6 in June.
The zone’s largest economy, Germany, reported the largest growth in its services sector in three years. France also reported gains in demand for services.
European markets rose sharply on the release of the Markit survey and carried forward in early morning U.S. trading.
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