Jun 25

Dry Powder at the Fed?

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Reaction to Dr. Bernanke’s latest press conference (June 22) has been rather more biting than his first conference last April.

A blog on Forbes.com put it less than mildly:  Bernanke Admits He’s Clueless on Soft Patch

On Bloomberg.com: Bernanke Public Approval Declilnes to Lowest with Too-Slow Economy in Poll, as if Dr. B is actually subject to an election.

And, some economists and former Fed officials thank Dr. B should rethink the central bank’s wait-and-see policy as growth slows.

Undoubtedly, we can expect a slower economy for a couple of quarters. (just ask the Economic Research Institute).  So, why is Dr. B not scrambling around for another round of monetary stimulus?

Well, it has happened time and again in the history of the Fed, and is happening again.  Facing some rather potentially severe known unknowns, he is undoubtedly keeping the Fed’s “powder dry” (if they have any substantial supplies left), awaiting very real future problems, such as: (1) Greek default and the potential for contagion, and (2) US failure to increase the debt limit and become a ‘restricted default’, in rating agency language.  And, I believe he is hoping the ultimate fate of these issues will become clearer before the US economy approaches the feared zero growth number.

We business people sometimes see academics as those who live ‘in a perfect world’ or have their ‘heads in the clouds.’  However, we should not underestimate Dr. B and his survival instinct.  Don’t forget that he has his bosses at the large banks and the nation’s CEO to report and meet their needs first.  And, Dr. B may be a lot more practical than many think he is.  Meanwhile, one can speculate as to what form that dry powder may take…because it will likely come…eventually.