What Does Wall Street Really Want From Ben Bernanke?

Stocks reacted, on balance, positively to Ben Bernanke's remarks to Congress.

Strategists say the Fed is not out of bullets regarding economic stimulus.

Ben Bernanke's two-day stint in front of Congress ended with the Fed chairman doing something few expected him to do: Nothing.

No raucous cheerleading, nor dour hand-wringing. There was no deft politicking, nor were there bold pronouncements from the US central bank chief about Quantitative Easing II.

Instead, there were mostly gentle warnings that the road ahead would be difficult, accompanied by the notion that the Fed has little appetite for either stepping in front of the nascent economic recovery or goosing it from behind—and will step in only if compelled to do so.

The question then, after two days of Bernanke-speakthat was accompanied by two distinctly different market reactions, is whether that will be enough.

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"The bottom line is that monetary policy isn't going to be loosened any time soon," observed Paul Ashworth, senior international economist at Capital Economics in London. "The best that can be said is that it isn't going to be tightened for a couple of years either."

Investors appeared to want more from Bernanke on Wednesday: After the chairman issued his remarks about the "unusually uncertain" outlook for the economy, stock indexes sold off fairly violently. Speculation mounted that Wall Street was anticipating some form of stimulus indications, such as eliminating interest payments on excess reserves or more buying of mortgage-backed securities.

But the day's market reaction seemed in retrospect to be more knee-jerk in nature. As the chairman took the hotseat for his second day of testimony, investors largely ignored his remarks and instead focused on a fresh round of solid earnings reportsthat signaled that corporate America is rebounding even if little else shows significant signs of improvement.

The thrust of Bernanke's response, in fact, may not even have been geared toward investors specifically.

Some observers saw him instead preparing Congress for the need, sometime in the future, for more stimulative measures should the economy continue to languish.

"Much of what he said was geared for Congress—a reluctant, recalcitrant Congress—to (get it to) approve anything having to do with fiscal stimulus," said Quincy Krosby, general market strategist at Prudential Financial in Newark, N.J. "If he had been a cheerleader and the market went up, and then the data continued to be weaker, he loses credibility."

So what, then, does Wall Street really want?

A popular story making the rounds earlier this week was that the Fed was looking for ways to buck the Dodd-Frank financial reform lawand loosen capital requirements for banks. The measure would be geared toward helping free up money for loans, something desperately needed by small businesses that have been hit with strict collateral requirements for financing.

Indeed, Bernanke issued a 19-page addendum with his remarks, titled "Addressing the Financial Needs of Small Businesses," that apparently fell short of assuaging investor concerns. The document arose from a series of 40 meetings over the past six months at each of the Fed branches to address the needs of small business.

"The only concrete recommendation from these meetings that was highlighted by Bernanke was 'extensive training programs for our bank examiners' to support such 'viable' lending," said Michael S. Hanson, credit strategist for Bank of America Merrill Lynch, in a note to clients. "The Fed remains concerned that a lack of a rebound in bank lending could continue to hold back job growth and investment, especially by small and medium-sized businesses, and so we would expect further focus on this issue by Fed officials in the coming months."

It's important to remember that even after driving the funds rate to near zero and buying up more than $2 trillion in mortgage-backed securities, the Fed isn't out of weapons yet, said Mike O'Rourke, chief market strategist at BTIG in New York.

"The point is the only thing that limits the Federal Reserve's options is Ben Bernanke's imagination," O'Rourke said. "There was once a time we believed the Fed could run out of bullets, but recent history has proven otherwise. It is not a finite world and to believe it is could be dangerous."

Cutting interest paid on excess reserves is among the more popular ideas right now, as that would provide further discouragement for banks to keep hoarding money.

Among the less popular measures is buying more debt, such as mortgage-backed securities or Treasurys. The move likely would drive interest rates higher when the flood of debt is sold back into the marketplace.

For now, then, the Fed appears ready to sit tight.

And judging by the market's reaction, on balance at least, it is content with Bernanke's subdued concern over the economy's future. Thursday's gainsoutweighed Wednesday's losses, and the market resumed the mild rally it has staged after an awful two-month run.

"In the Fed's outlook they don't think it's necessary to do anything more," Dan Greenhaus, chief economic strategist at Miller Tabak, told CNBC (see video above). "So while the market reacted somewhat negatively, some would argue because he didn't expand on what he could do, they don't see a reason to do anything."