Dissecting Bernanke’s June 22nd News Conference

Federal Reserve Chairman Ben Bernanke held a news conference on June 22nd shortly after 2 pm, following the Fed’s policy meeting. As usual, the market vividly showed it’s opinion of Mr. Bernanke’s comments:

Oh Ben. In fairness, there hasn’t been a heck of a lot of happy news for him to share. Nevertheless, why can’t an aide of Ben Bernanke’s set his watch 2 hours behind so that he delivers his comments after the market closes?

Ben spoke to several salient points.  Let’s take a deep dive into each:

Inflation:  “I have been a longtime proponent of an inflation target…[snip]  There’s nothing imminent, but again we will continue to discuss this and as appropriate we will be consulting about it.”

Interest rates have been kept extremely low for several years now to not only enable banks to lend to each other cheaply, but to also encourage growth in the stock market (and as a side effect, business growth).  Nevertheless, it’s been unnatural to keep interests rates low for such an extended period of time.  So whether it’s irrational or not, many are concerned over what may happen to the inflation rate and economic growth once the Fed beings to raise rates again.  The market doesn’t like uncertainty over inflation, so -1 for Ben.

The Pace of Economic Growth:  “Part of the slowdown is temporary and part of it may be longer-lasting.  We do believe that growth is going to pick up into 2012 but at a somewhat slower pace from what we had anticipated in April.  We don’t have a precise read on why this slower pace of growth is persisting.”

I do, and so does most of America:  jobs.  Or even more accurately:  household debt, which keeps consumers from spending, which keeps businesses from hiring because the demand isn’t there.  I agree to expect growth in the latter half of 2012 — in particular, since banks appear to be using IPO’s to make money this year which may help discourage a double dip this year.  Nevertheless, institutional investments may not have the power to keep the market growing.  It’s steady investments by individuals over the long term, yet individuals are increasingly lacking the money to invest.  -1 for Ben.

The Labor Market:  “As of last August…inflation was low and falling, and unemployment looked like it might be even beginning to rise again.  [snip]  I think we are in a different position today, certainly not where we would like to be but closer to the dual mandate objectives than we were at that time.”

The Fed started talking about QE2 in August 2010, and implemented that strategy by buying debt instruments (government debt, mortgages, commercial loans, etc.) a few months later.  Last August in terms of jobs was more bleak than this August may be.  So while it’s frustrating and demoralizing to many Americans to not be able to find a job nor to be able to afford to train themselves for a job in a new industry, and while job growth is slower than many feel it would be than if the issue of household debt were directly addressed, prospects are better than last year.   +1 for Ben.

On QE3:  “With respect to additional asset purchases, we haven’t taken any action, obviously, today.  [snip]  I think the point I would make, though, in terms of where we are today versus where we were in August of last year when I began to talk about asset purchases is that at that time…many objective indicators suggested that deflation was a nontrivial risk and I think that (QE2) has been very successful in eliminating deflation risks.”

I would agree that the cash infusion helped ward off deflation, yet was a very nonsensical policy to hardworking individuals who watched banks’ coffers fill with cash.  Deflation during a period like this is like putting a nail in the coffin when it comes to job creation.  Deflation is usually associated with a decrease in prices, and if companies aren’t earning what they used to from consumer purchases they certainly won’t hire additional staff (nor be able to provide pay raises).  While deflation pressures subsided, it may have been sensible at that time to direct part of QE2 to Main Street to purchase debt on household books as well.  So Ben is even here.

The Greek Crisis:  “(The Federal Reserve) did discuss it, and it is one of several potential financial risks that we are facing now.”

We’re going to witness more crises in the future as municipalities run out of money.  So it’s smart for Ben to monitor the situation in Greece, yet not overreact.  So +1 for Ben.

The Slow Recovery:  “The reduced pace of the recovery partly reflects factors that are likely to be temporary. In particular, consumers’ purchasing power has been damaged by higher food and energy prices and the aftermath of the tragic earthquake and tsunami in Japan has been associated with disruptions in local supply chains, especially in the auto sector. However some moderation in gasoline prices is now a prospect and the effects of the Japanese disaster and manufacturing output are likely to dissipate in coming months. Consequently…the committee expects that the pace of economic recovery will pick up overcoming quarters.”

I think that Ben started to grow weary at this point and could have used a shot of espresso.  This quote reiterates clearly than Ben Bernanke thinks more like an economist than someone with down home common sense.  Consumer purchasing power has been damaged, but it’s not as correlated to higher food and energy prices as it is to household debt caused by decreasing wages and the lack of jobs.  I think Mr. Bernanke is a smart and thoughtful person, but desperately needs an Elizabeth Warren or even a real business owner in his orbit versus textbooks and other economists.  -1 for Ben.

It’s not easy to right a ship that exploded just over 3 years ago, but the right words would have made a much better effect on confidence.  While I feel he and the Fed have done a good job in preventing deflation and an unemployment spiral, it’s clear that the administration needs fresh perspectives to help spur the country into a new phase of real growth fueled by middle class jobs and individual investors.