Bernanke Bets on Stock Market Wealth
Never before have we seen a Fed chairman so direct about what he wants from Fed policy. Making the case for QE2, Bernanke verged from his charter, saying that he wanted higher stock prices, not lower unemployment or higher inflation, as is consistent with his charter.
The Fed’s Charter
The Federal Reserve is tasked with the job of keeping unemployment as low as possible while promoting policies that create consistent, but positive, inflation. The target for unemployment is a mere 4-5%, what is considered “zero unemployment,” or levels where only frictional unemployment is present.
As for inflation, the Federal Reserve typically targets a 2% inflation rate. That rate is considered to be safe in terms of protecting currency values but also high enough to resist a general fall in consumer prices, or deflation.
Targetting the Market
The move away from the legal charter of the Federal Reserve is something investors still haven’t wrapped their heads around. Rather than promote policy that has been near standard since 1913, Bernanke opted to push in a new direction. He’s gone full blown inflationist, thinking that higher stock values will mean more wealth for the country. More stock market wealth, he apparently believes, will trickle through the real, physical economy and increase aggregate demand.
Whether or not Bernanke is correctly calling the shots is up for debate, and I’m sure he’s having quite the debate as he lays down to sleep tonight. Some $600 billion in fresh cash will be injected directly into the market following some $1.25 Trillion in QE1 for a total of $1.85 trillion in new injections. That’s no small infusion, considering it follows interest rate policy of 0-.25% overnight interest rates. (Some Treasuries have gone negative TIPS) The Fed ran out of bullets, and then it pulled some from thin air.
Should Bernanke hit the target, he’ll strike a bullseye. Should he miss, we’ll see an asset bubble larger than real estate. Nearly every asset traded on the markets rose on the news. Every. Asset.