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, Draghi cut the ECB target rate by a quarter percent to 1.25 percent from 1.5 percent. 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, 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 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 Bernanke is less impressed. The Fed downgraded its 2012 forecast for real growth from 3.5 percent to 2.7 percent. And it raised its unemployment estimate for next year from 8 percent to 8.6 percent by year-end 2012. And despite continued inflation pressures, the central bank essentially kept its inflation target at a low 1.7 percent.
So it’s not unreasonable to suggest that Bernanke is setting the stage for a new round of QE. Growth at 2.7 percent 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, Bernanke may follow Draghi with a U.S. easing move.
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