The two words of the day: Bernanke and bullets.We heard them many times, and we’re guilty of using them several times as well.
So anyway, what happened today? Basically, Bernanke committed two sins in the eyes of the market: he was too bullish (ironic!), and he didn’t detail the bullets he had available to fire, should it come down to that.
So, should we worry? Heck no, argues Mike O’Rourke at BTIG:
Senator Shelby specifically asked if the Fed was running out of options if the economy slows. The Chairman said he believed the Fed still has options. More specifically, while reasserting that current policy is stimulative, Bernanke lobbed three potential options: jawboning, reducing the IOER from 25 basis points to zero and finally replacing securities running off the balance sheet with new purchases or even making additional purchases. There is no doubt that those are basically uninspiring responses to the question, “Are you out of bullets?”
The fact is the Fed Chairman did not really answer the question “Are you out of bullets?” We now what you are thinking, and no, the correct answer is NOT “They are.” It is actually quite the contrary. Has the market forgotten the alphabet soup of programs created by the Fed led by this Chairman 18-24 months ago? The Europeans have not forgot them, they are the foundation for the ECB’s 2010 playbook. Here in the U.S., almost all of the emergency measures have been wound down. Some worked, some did not work. The point is the only thing that limits the Federal Reserve’s options is Ben Bernanke’s imagination. There was once a time we believed the Fed could run out of bullets, but recent history has proven otherwise. It is not a finite world and to believe it is can be dangerous.
Such is the power of the Fed. There’s really no end to the bullets he has, even if that means buying gold, cars, houses, and stocks directly, though if it ever comes to those things, we’ll probably be long toast.