Tuesday, July 24, 2012

Fed, Bernanke Ready to Stimulate

Even though Ben Bernanke is understating the eventuality of more stimulus for the economy, it's becoming apparent from his recent statements about the weakness of the U.S. economy that it is inevitable that the Federal Reserve will again pour money into the economy.

It's only a matter of when and by what means.

Some believe Bernanke may wait until the September meeting to see if there are any positive economic effects from the continuation of Operation Twist.

But with anemic jobs creation and continuing devastating unemployment, the question is whether the Fed has the nerves to wait another couple of months before taking action.

Action could be taken at the upcoming meeting from July 31 to August 1. If they don't and the economy falters, even more extraordinary pressure will be applied as the elections approach, especially for the hapless Obama and his administration, which has been totally ineffective in helping the economy along, and rather are making it worse by wanting to increase taxes rather than cut government spending.

It idea is if the Fed waits until September they'll have a better view of whether or not Operation Twist has done any good. I would be surprised if they do wait that long.

To me, the terrible American and global economy has called Bernanke's bluff, as growth numbers from key nations like China continue to move downward, confirming the precarious state of the global economy, which has such a detrimental impact on the U.S.

So Bernanke and the other Fed heads face growing pressure. If they fail to stimulate, the fallout will be enormous for them, even though over the long term it's a disaster.

But what makes me think stimulation is around the corner is former Fed officials who have been opposing more stimulus are starting to change their viewpoint, suggesting growing political pressure from the Democrats, who are afraid of getting slaughtered in the upcoming election, whether Obama gets reelected or not.

Also significant is the fact there is no real, sustainable economic growth in America which has signaled to the Fed that it is growing fast enough on its own.

In their view that's a disaster, and pushes them towards another round of easing, whatever the mechanism for doing it will be.

I think the Fed is growing closer to stimulating, and it would be surprising if it isn't done within a week. If not, the markets will remain in turmoil because of the uncertainty surrounding whether or not there will be a stimulus.

With everything pointing towards it, I can't see what reason the Fed could give for waiting, in light of the risk of not doing it now.

Next week will be enormous heading into August.

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