Tuesday, June 15, 2010

Fed in "Quiet" Discussions Over Economy

According to the WSJ, Fed officials are quietly debating steps to take if the economy falters or inflation falls further. What do you call a debate that is so quiet that it is plastered on the front page of the WSJ? A hint.

Fed Chairman Ben Bernanke has made several comments voicing his optimism about the economic recovery and down-played the risks of a double dip. Yet the signs of a double dip are growing more evident by the day as domestic economic numbers fail to impress and turmoil overseas threatens our recovery further. So it's time for the Fed to hedge its bets and leak a story to the press and say something like:

"I know we said we were going to end our asset purchases, but we might reverse course, even though rates are already preposterously low and monetary stimulus at this point may have a muted effect on demand. We have to do something, but frankly, we're all out of ideas that don't involve a helicopter. Let's hope we're wrong and our next move is a tightening. But just in case we're wrong, or wrong about being wrong, be forewarned. We have no idea what we're doing. Got that bond market?"

Crystal clear.

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