All Eyes Were on Ben

When the clock struck 2:00 pm GMT yesterday, all eyes were fixed on one man – the Almighty Big Ben Bernanke. Speaking for the Federal Reserve, Big B (as I call him sometimes) took center stage as he aimed to educate the public on the country’s economic health.

In his previous performance, Big B remarked that the pace of economic contraction is slowing and that he expects overall economic activity to bottom out then turn up later this year. He projected that the federal deficit will hit $1.8 trillion this year before shrinking to $1.3 trillion in 2010. According to him, this would bring the ratio of public debt to nominal GDP to a whopping 70% in 2011.

Yesterday’s act was quite similar as he took another optimistic yet cautious stand towards the economy. In his speech, Big B reiterated the need to bring the deficit under control. He mentioned that consumer spending, which makes up more than 70% of all economic activity, has now started to stabilize while the decline in housing market has begun to slow down. In addition, he said that the global demand slump in US exports has eased as signs of recovery have been popping up with US’s trading partners.

Probably for the purpose of not getting ahead of himself, Big B showed some caution again as he cited the country’s poor labor market and credit conditions would likely limit the economic recovery. The Fed must remain “open and accommodative” with regard to monetary policy to ensure a smooth economic recovery, he said. Bernanke expressed the view that even though economic conditions have improved slightly, it hasn’t been enough to warrant a run to the exit.

Some experts had said that by keeping monetary policy at its current levels, the US runs the risk of hyperinflation. Remember that the Fed has already dropped bomb after bomb of financial stimulus packages in the economy to combat the recession. Market participants have become wary about the risk of surging inflation once the market has stabilized. To answer this, Big B assured them that the Fed has the appropriate strategies and tools to make sure that future inflation doesn’t balloon once the economy starts to pick up. Some economists believe that he was preparing the market by imparting his views and plans at an early stage.

It appears that the markets took the statement as a signal of confidence towards the “Greenback.” The currency gained in the couple of hours immediately during and following the report. However, the move was certainly far from convincing… It seems that traders remain undecided on whether they want to eat some risk up or just stay away completely!

Big B is a courageous man… Imagine the difficulty of putting on a brave face like that and display a feeling of optimism to the markets during these tough times. He is the face of the Fed and the man at the center of this economic recovery. He is a marked man. The markets would probably move at the slightest grin or frown… okay not really, but you get the point! It’s amazing how his words can shape the mindset of the public.

If this kind of cautious optimism keeps up… We might just see confidence slowly return to markets. If the Fed continues to see a bottoming of the recession, it could encourage consumers to spend, firms to expand and hire more workers, which would then help alleviate labor conditions.

In the face of this economic recession, it just doesn’t seem likely for the Fed to push interest rates higher or unwind the stimulus packages it has injected into the economy any time soon. Yet every recession needs a man to lead the people out of the darkness of the night – can Ben Bernanke continue to be that knight? Can Big B spur optimism? We’ll just have to wait and see…