Bernanke is no Greenspan. The Maestro was able to herd the FOMC where he wanted it to go. Bernanke, who is a monetary radical, is unable to do so. He faces not only FOMC voters who disagree with him, but who also will do so publicly! I think this is unprecedented. He therefore faces a very unpalatable choice: go with consensus and face a no-growth future, or go with massive QE and face huge controversy.
It is clear from recent statemments that he is trying to split the difference. Goldman says that in order for the Fed to meet its policy objectives, it needs to triple its balance sheet from $2T to $6T. There was a moment in time when the stock market thought that this was going to hapen, and the Dow rose by 1000 points. Now it appears that the best Bernanke can do is maybe $500B (we’ll know next week). That is 25% of what needs to be done, and it sends a strong signal that he does not have control of the FOMC.
This means that the Fed will continue to miss its inflation and employment targets, and that growth will remain weak. Investors who are speculating on inflation (gold, yen, TIPS) will be disappointed. We will have subnormal inflation, and the entire economy and all asset classes will suffer.
The only hope is that Obama’s governors get confirmed quickly (hold your breath) so that BB will have a commanding majority. Frankly, I have no idea how the confirmation process is going, although it is good news that Janet Yellen is now the vice chairman.
It is clear from recent statemments that he is trying to split the difference. Goldman says that in order for the Fed to meet its policy objectives, it needs to triple its balance sheet from $2T to $6T. There was a moment in time when the stock market thought that this was going to hapen, and the Dow rose by 1000 points. Now it appears that the best Bernanke can do is maybe $500B (we’ll know next week). That is 25% of what needs to be done, and it sends a strong signal that he does not have control of the FOMC.
This means that the Fed will continue to miss its inflation and employment targets, and that growth will remain weak. Investors who are speculating on inflation (gold, yen, TIPS) will be disappointed. We will have subnormal inflation, and the entire economy and all asset classes will suffer.
The only hope is that Obama’s governors get confirmed quickly (hold your breath) so that BB will have a commanding majority. Frankly, I have no idea how the confirmation process is going, although it is good news that Janet Yellen is now the vice chairman.
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