In a much anticipated speech to a Federal Reserve conference this morning, Federal Reserve Chairman Ben Bernanke said that the Fed will not stimulate the economy with a QE3. He said the economy needed stimulus and Congress should act to do so. Stocks immediately fell 200 points or nearly 2% upon release of the news.
This comes on the heels of the bad news that the economy grew at a slower rate than expected. The GDP grew at 1% this spring and only 7 tenths of one percent for the first 6 months of the year. This is skirting treacherously close to a double dip recession.
“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” Bernanke said. He went on to say the Fed will further consider its options at its September meeting. “The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability,” he added.
Republicans threatened Bernanke against a QE3
Republican Congressmen and Senators warned Fed Chairman Bernanke against any stimulus by the Fed to the economy. One GOP Presidential candidate indicated if Bernanke stimulated the economy with a QE3, it would be considered treason [in Texas and presumably by him]. Perhaps these threats played a role in Bernanke’s action, or lack thereof. Only Bernanke knows.
The reason the GOP members of Congress gave for their warning is they believe a QE3 would be inflationary. In this recession, inflation has been low and not even a factor. The cost of living rose from .03% to .05% last month, but these levels are not high enough to be alarming at the moment.
The stimulus that the Republicans are warning against is the Fed printing money and using it to buy up Federal Bonds (Treasuries). This would give the banks more money to spend and reduce the interest on our debt.
Bernanke tells Congress it should act to stimulate the economy.
Chairman Bernanke took a swipe at the dysfunction in Washington over the nation’s economy. He warned that things would “spiral out of control” without major changes. He made note of the theatrics surrounding the debt ceiling which
S & P cited as a reason for the credit downgrade.
“The country would be well served by a better process for making fiscal decisions,” he said. “The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.”
“Policymakers must work to promote macroeconomic and financial stability; adopt effective tax, trade, and regulatory policies; foster the development of a skilled workforce; encourage productive investment, both private and public; and provide appropriate support for research and development and for the adoption of new technologies,” he said.
“Our nation’s tax and spending policies should increase incentives to work and to save, encourage investments in the skills of our workforce, stimulate private capital formation, promote research and development, and provide necessary public infrastructure,” he said. “We cannot expect our economy to grow its way out of our fiscal imbalances, but a more productive economy will ease the tradeoffs that we face.”
Bernanke’s suggestions have little chance of passage in GOP House
Bernanke’s comments fly in the face of the policies that Republicans espouse. His suggestions for fixing the economy call for investment in research & development, education, job training, building infrastructure, and changes in the tax code. All of these ideas are opposed by Republicans even though many were planks in GOP platforms prior to the election of Obama.
The only recipe for fixing the economy Republicans will accept is spending cuts, not investment; tax cuts, not tax reform. Tax reform means closing loopholes that allow billionaires and corporations to escape paying tax at all while lower and middle class taxpayers pay an ever increasing share of all taxes collected.
Perhaps Bernanke wants to see what the posture of the new 12 member committee will be when it convenes Sept 6. If things go as many of us expect, it will become obvious that nothing will happen and therefore the mandatory spending cuts will kick in. That is why the September Fed meeting will be crucial.
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