Tuesday, February 9, 2010

Bernanke's Choices

Fed chairman Ben Bernanke is expected to offer his "exit strategy" tomorrow, disclosing what he expects the Fed to do in managing the final stages of the economic recovery. One problem is that their key lever is the Fed funds rate, which helps determine interest rates around the country. But it's already at a virtual zero level. Raising it would raise interest rates, at a time when borrowing is already very thin.

At the same time, Bernanke might feel the need to raise interest rates to fight off the specter of inflation, especially given the strong growth we saw in the fourth quarter of '09. But if he does it too soon, it could choke off a lot of that growth.

What does that leave? Bernanke could use his testimony to signal optimism in the American economy, hoping that would spur consumer confidence and loosen the credit spigots. But financial information is so plentiful these days, and so readily available, that it's hard to imagine Bernanke reporting enough news on the economy to make a solid difference.

Is there another trick up his sleeve? We'll find out tomorrow.

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