Fed Chairman Ben Bernanke, in a much-anticipated speech today, announced no new or additional steps the Fed would take to help the ailing U.S. economy. Instead, he expressed optimism the economy could continue to recover, based on its own internal strength and from past assistance given by the central bank.
Bernanke reinterated the Fed's determination to keep the federal funds rate "exceptionally low" through mid-2013 at least. He did not, however, say what many traders had been hoping to hear: That the Fed would embark on a further round of quantitative easing--a so-called QE3.
Markets were underwhelmed by his remarks. The Dow fell slightly then rose 67 points to 11,218 at 11:20 a.m.; 10-year treasuries fell 2.15 percent; gold rose 1.64 percent.
The chairman said he remained strongly optimistic for the U.S. economy's long-term health, and that he expected inflation to remain at or below 2 percent. He also acknowledged, however, that the recent downgrade of the nation's credit rating had undermined both "household and business confidence."
He implied that there was only so much more the Fed could do to stimulate the economy, and that it was time now for Congress and the White House to create "policies that support robust economic growth in the long term," to reform the nation's tax structure and to control spending.
He said that the Fed would continue to review, as circumstances might demand, the full "range of tools" at its disposal to "provide additional monetary stimulus."
Critics question whether the Fed has anything left in its toolbox it hasn't already tried. The box, they insinuate, is empty.
Is that true? Does the Fed really have no additional means at its disposal?
There's plenty that the Fed could do. Unused tools still remain, but none is without controversy. Some, politically, are too hot to touch. And still others are so potent that their use cannot be imagined, short of some doomsday scenario.
It was just one year ago that Bernanke announced a second round of so-called "quantitative easing," dubbed QE2. As with its predecessor, QE1, announced in March 2009, the idea was for the Fed to buy private debt on a massive scale, thus keeping interest rates low and invigorating the U.S. economy with a booster of inexpensive cash. The stock markets of the world have benefitted, and traders earlier this week were hoping that Bernanke today would have announced QE3--or something like it.
He did not.
The effectiveness of first two QEs has been questioned. Critics acknowledge that easing has brought temporary benefits, but they argue those have accrued primarily to the stock market. They question whether flooding the markets with yet more cheap money is a good thing for the economy long-term.
Lance Roberts, chief strategist for Streettalk Advisors, calls quantitative easing just so much "heroine." The first two shots of it, he says, indeed invigorated markets. But the effect was short-lived. Another round of it might help the U.S. "temporarily avoid a double dip," but it would not solve "our long-term fiscal problems."
It's not only Fed outsiders such as Roberts who reject QE3. Some Fed insiders oppose it. In a rare instance of internal dissent, three regional Fed presidents (Dallas, Philadelphia and Minneapolis) earlier this month voted against Bernanke's decision to keep interest rates low through 2013. President Richard Fisher of Dallas said in a speech that the U.S. economy already is "awash with liquidity."