While stocks are responding to Bernanke’s talk of doing more if needed (exactly what the minutes revealed yesterday), he is at the same time implicitly saying he doesn’t think they need to do more because he thinks the economy will get better in the 2nd half of the year as he still believes the factors slowing growth right now are ‘transitory’ and he thinks inflation pressures will recede and he gives a variety of reasons why. He also went on to defend QE2 against the criticism as he said it helped the economy thru “easier financial conditions” that reduced the “risk of deflation” and shored up economic activity. In terms of doing more, he said “we have a number of ways in which we could act to ease financial conditions further” and goes on to list them. He also says, “on the other hand, the economy could evolve in a way that would warrant a move toward less accommodative policy” and went on to discuss the exit strategy. Bottom line, this is more of the same from the Bernanke Fed, rather than reevaluate Fed policy to see if the medicine they employ is still right for what ails us, he assumes everything he does works and if the economy doesn’t respond, just up the dosage. With this said, the inflation data will tie his hands to doing more for a while and as I said yesterday, I believe it will take a 15-20% drop in stocks and/or VERY poor economic data before he acts again, neither which we have now.
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