Big Question Now Is Whether Bernanke Will Follow Europe’s Central Bank

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Will the Federal Reserve’s Ben Bernanke soon follow the European Central Bank’s Mario Draghi? In his first action as Jean-Claude Trichet’s replacement, Mr. Draghi cut the ECB target rate by a quarter% to 1.25% from 1.5%. It was a surprise.

Given the hullabaloo over Greece’s bailout referendum, which is now dead in the water, and the likelihood of a new Greek government, Mr. Draghi’s liquidity addition is a modest but useful antidote to major financial stress and uncertainty in the Eurozone. He’s probably going to cut rates a lot more in view of Europe’s perilous financial and economic situation.

So that leads to this question: Will Mr. Bernanke soon surprise the U.S.?

At his news conference yesterday, the Fed head emphasized the ongoing weakness in housing as a key factor in the sluggish economy and high unemployment rate. He openly acknowledged that the door is wide open for a new Fed action to purchase mortgage-backed bonds in order to provide additional support for the weak housing market. This goes beyond Fed actions to reinvest MBS bonds as they mature. In other words, quantitative easing.

Wall Street may be impressed with recent economic data, like the ISMs and other stats that show the economy is not now flipping into recession. But Mr. Bernanke is less impressed. The Fed downgraded its 2012 forecast for real growth from 3.5% to 2.7%. And it raised its unemployment estimate for next year from 8% to 8.6% by year-end 2012. And despite continued inflation pressures, the central bank essentially kept its inflation target at a low 1.7%.

So it’s not unreasonable to suggest that Mr. Bernanke is setting the stage for a new round of QE. Growth at 2.7% is insufficient to significantly reduce unemployment. And housing remains a big problem. So while the U.S. doesn’t face the kind of financial stress that Europe does, Mr. Bernanke may follow Mr. Draghi with a U.S. easing move.


The New York Sun

© 2024 The New York Sun Company, LLC. All rights reserved.

Use of this site constitutes acceptance of our Terms of Use and Privacy Policy. The material on this site is protected by copyright law and may not be reproduced, distributed, transmitted, cached or otherwise used.

The New York Sun

Sign in or  Create a free account

By continuing you agree to our Privacy Policy and Terms of Use