If Ben Bernanke thought 2011 was challenging, wait until the presidential campaign heats up in 2012 and the rhetoric really starts to fly.
After two sizable rounds of quantitative easing and a quasi-third-round in the form of the continuing Operation Twist, the 58-year-old second-term chairman of the Federal Reserve Board remains the focal point of virtually every effort to keep a fragile economy on the right track.
“Right now, the political pressure on Ben Bernanke is intense, but I certainly hope he continues his courageous stand and operates the Fed independent of politics,” said Scott Colyer, chief executive and chief investment officer at Advisors Asset Management Inc., a $7.2 billion advisory firm.
Even as observers such as Mr. Colyer believe the ultimate “fix” for the U.S. economy has to come from Congress in the form of fiscal responsibility, the Fed chairman will continue to be seen as the individual with some sort of magical powers to keep the engine stoked.
Of course, with every sideline analysis of what the Fed should or should not be doing, there is the accompanying comments about the limited amount of ammunition Mr. Bernanke actually has at his disposal.
“The Fed is pretty much out of traditional ammunition [in the form of interest rate cuts], and the new ammunition [quantitative easing] is losing its effectiveness,” said William Cheney, an economist with John Hancock Financial Services Inc.
Operation Twist, which involves selling shorter-term debt and buying longer-term bonds to try to drive down yield of longer-term bonds, is the perfect example of that conundrum, according to Mr. Cheney.
“All these policies are also designed to drive investors into riskier assets, but what the economy is really short on is spending, not money,” he said. “The economy really needs a short-term shot in the arm and a long-term plan to rein in spending, but what we're getting right now is the opposite.”
In terms of the Federal Reserve's dual mandate of keeping inflation in check and keeping unemployment low, there is a time when reality and logic should be factored in, according to Mr. Cheney.
“In theory, they should be just as upset about unemployment being too high as they would be about inflation being too high,” Mr. Cheney said. “In order to get any kind of inflation, we would need unemployment to be below 7%,” compared with the current 8.5% range.
Inflation, which is not currently seen as a serious threat, could lead Mr. Bernanke to support an increase in the short-term lending rate, currently at between zero and 0.25%.
But this year, the Fed made the unprecedented statement that it expects to leave interest rates alone until at least 2013.
Such a strategy is not surprising because politicians never want to see a rate hike during an election year. But to publicly state such a position paints Mr. Bernanke into an even tighter corner, while simultaneously implying that the Fed does not see any real economic growth in the near future.
“I'm not sure why the Fed would have chose the target range of 2013 without knowing the complete fallout from Europe, but it paints a very dim picture of the U.S. economy,” said Kevin Mahn, president and chief investment officer at Hennion & Walsh Inc., which has more than $250 million under management and supervision.
“Ben Bernanke is in a very precarious position,” Mr. Mahn added. “If we see the economy growing at less than 2%, what tools does he have left?”
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