Category: Federal Reserve

Wall Street has to love Federal Reserve Chairman Ben Bernanke. With a serious liquidity crisis developing Helicopter Ben showered the markets with money.  Perhaps the investment bank and hedge fund managers won’t have to sell their yachts after all. At least not yet.

As for the almost immediate result of a huge cash injection? The stock market put in an impressive performance for the week, closing well about the closely watched technical resistance level of 13,300.

Bernanke earned his “helicopter” nickname as a result of a speech he made in 2002. Helicopter Ben said that if interest rates fell to zero in a weak economy, if need be he would drop money from helicopters into the banking system to keep it going. This was in reference to the price deflation plaguing Japan at the time, which sparked concerns that slowing inflation in the US could lead to the same situation.

In response to the liquidity crisis sparked by the meltdown of the sub prime housing loan lending market, the Federal Reserve and the European Central Bank have collectively added at least $350 billion of temporary reserves into the banking system. They didn’t use the helicopters favoring more traditional ways of providing liquidity.

Once again the US Federal Reserve takes no action on interest rates leaving the key closely watched Federal Funds rate unchanged at 5.25%.

The Fed probably really can’t decide what it should do and when in doubt does nothing. The Fed is positioned squarely between opposing market forces.

Fed chairman Ben Bernanke acknowledged the market’s concerns about a credit crunch brought on by problems in the sub prime lending market for real estate. Some market observers had hoped for a rate decrease to help alleviate those fears.

However, any decrease in interest rates could hit the value of the US Dollar hard and lead to a higher inflation rate. Many commodity prices are already soaring so inflation may be a problem sooner than later.

With risks apparent in both directions the Fed has its work cut out for it in coming months. Probably Ben Bernanke and the other Fed board members are hoping that they and the economy can somehow muddle through.

I doubt that they or the economy will be so lucky.