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In his second post-FOMC press conference, Fed Chairman Ben Bernanke touched on every topic, admitting that the recovery was weaker than expected and that beyond temporary factors like supply chain disruptions in Japan and high energy prices, he was at a loss as to what was causing the soft patch. In a Q&A session with reporters, Bernanke said a disorderly default in Greece would have significant effects on the U.S. economy, while adding that the Fed still had several tools at its disposal to pump up the economy.
With markets at a crossroads, amid a cooling economic recovery and a dangerous Greek crisis threatening the euro and the global economy, reporters grilled Bernanke and asked many of the right questions.
Brutally honest, Bernanke admitted that he had no clue what was actually causing the current fragility in the U.S. economic recovery. While the FOMC statement assigned blame outside of the U.S., pointing at Japan along with rising food and oil prices, Bernanke was put on the spot by a reporter who noted the inconsistency behind that explanation and a lowering of long term forecasts. Bernanke took the hit, admitting only some of the factors were temporary and that he didn’t know exactly what was causing the slowdown, but that it would persist. “Growth,” said Bernanke, “will return into 2012.”
Since December 2008, when a worldwide credit crisis threatened to take down the global financial system, the U.S. Federal Reserve has had a starring role. It has held the benchmark Federal Funds rate at historic lows between zero and 0.25% to keep the U.S. economy from stalling. And it's pumped more than $2.3 trillion into the American financial system, mostly by purchasing securities on the open market.
The key to these asset purchases has been two "quantitative easing" plans. The second of the two, known as "QE2," was a $600 billion initiative that was rolled out in November. It's supposed to wind down when the second quarter ends next week - which is what the Fed promised at the end of its last FOMC meeting in late April.
When the Fed's policymaking Federal Open Market Committee (FOMC) meeting breaks up at around noon today, pundits are expecting Team Bernanke to announce that it's holding rates steady, and is winding down QE2 as promised.
You see, there's a reason there's so much interest in the Federal Reserve plan for QE2 - and for its plan for the much-talked-about QE3: At some point, the Bernanke-led Fed will be forced to halt this epic stimulus initiative. And that could ignite an inflationary firestorm not seen in this country in decades - if ever. That will turn the Fed's mandate of maintaining "price stability" into a bad joke.
But, even worse, it could tip the U.S. economy into a double-dip recession, ignite widespread layoffs and drive unemployment skyward, and hammer this country's standard of living - especially in households that didn't prepare for this eventuality.