Ben Bernanke threw a curveball Wednesday in his midterm report to Congress.
The Fed view of the economy has been downgraded since its last report in February.
This is not totally new news, since the June FOMC minutes reported this downgrade.
However, “the majority saw the risks to growth as weighted to the downside.”
But here’s the disconnect.
With no inflation and weaker growth, including stubbornly high unemployment, Bernanke mostly talked about an exit strategy that would shrink the Fed’s balance sheet by removing liquidity. This was the Fed’s bias last winter when the recovery looked stronger. Now that the recovery looks weaker, the stock market was hoping to hear Bernanke hint of an easier policy that would increase liquidity if necessary. Didn’t happen. (Read Bernanke's Full Testimony Here)
But I have a different view of this story.