Bernanke speaks

Bernanke is not saying anything much different than when he spoke in Jackson. He is reminding the markets again that the Fed still has more levers to pull and they will discuss these at the next FOMC meeting. He remains optimistic that growth will pick up in the 2nd half and he cautions against any sort of fiscal tightening. Bernanke likes to shift growth responsibility to Congress now but it is Fed policy of collapsing the yield curve and the cost of money that has enabled the US government to spend money in a limitless fashion without any pushback from the market. On Aug 9th and Aug 26th, he said the Fed has more things to do if needed and today he repeated that again today. There is one thing though to have more things to do, it’s another thing to have them actually work. I assume on Sept 21st that the Fed will embark on buying longer term Treasuries with the proceeds from the sale of short term ones, thus buying the long end at historically low yields and highs in prices. The benefit is specious and the risk is that of subjecting their balance sheet to major interest rate risk if they choose to shrink it by selling some before the longer term securities mature. A dangerous game they play.

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