Bernanke’s Challenge

Tom Sowanick is Co-President and Chief Investment Officer of Omnivest Group in Princeton Junction, N.J.

Federal Reserve Chairman Ben Bernanke has a formidable challenge this afternoon when he addresses the economic and investment community post the 2-day FOMC meeting. His challenge will be to paint an economic environment that
indeed has drifted into a soft patch but at the same time offers a somewhat upbeat forecast for the second half of the year.

Failure on his part to implant confidence in our business leaders and investors will push risk assets lower and temper any desire by corporations to continue hiring. At the same time, Bernanke has to paint a picture that does not give Congress too much hubris which may lead to a failure to raise the much needed
debt ceiling before meaningful budget cuts can be offered.

Investors will also be on the alert relative to the Federal Reserve’s view on inflation.

In his last public statement, Ben Bernanke repeatedly labeled recent inflation as transitory. At least for now, he can enjoy the tail wind of lower oil prices and other commodities which have fallen significantly since last April.

The delicate balance for Bernanke’s presentation takes on even more importance this afternoon given that fiscal policy has been stymied by the lack of bipartisan cooperation.

The Fitch rating agency has made August 2nd a hard deadline for Congress to pass the debt ceiling. Without the passage of the debt ceiling, Fitch will put the US on negative credit watch and will most likely be followed by Moody’s and S&P.

The obstacles confronting the Federal Reserve and Bernanke are truly daunting at this time. In our opinion, Bernanke should reiterate that the Fed will do whatever it takes to promote economic growth while lowering unemployment.

In this sense, QE2 light and/or QE3 should also be made available if necessary. For sure, debates are raging about the value added from QE2, but without new fiscal initiatives on the horizon, the only tool available to promote growth and provide a backdrop of economic stability is the prospect of a QE3 program, again, only if necessary.