Busch: Fed to Stay Course, Markets to Correct Course

Today Federal Reserve Chairman Ben Bernanke makes his way to Capitol Hill to appear before the Senate Budget Committee for their first meeting of the 112th Congress. He will be testifying on the U.S. Economic Outlook: challenges for monetary and fiscal policy.

We can expect numerous questions on today’s employment data as well as the looming debt ceiling hike. Democratic senators will likely focus on the fall in the unemployment rate and will be generally supportive the Fed’s actions.

However, there’s a new Congress in town and this group will likely not be as obsequent. Look for these questions to be asked from the Republican and Tea Party contingent:

  1. Given the increase in interest rates after the Fed engaged in QE2, doesn’t this show that it’s misplaced and ineffective?
  2. With newly created tools like interest rates on reserve requirements and a balance sheet with over $2.3 trln dollars (and growing), the number of levers available to the Fed has grow substantially. However, isn't it true that this also increases the potential for error as well?
  3. The economy and financial markets have been extremely volatile over the last decade. Also, the Federal Reserve has been the most active in its intervention into private sector and most active in its monetary policy over the same period? Is the Fed by its actions contributing to this volatility?

On February 7th, Bernanke will address the National Press Club. It will be the first time since the financial crisis two years ago that he’s taken questions from the press. This will provide another opportunity for the Chairman to explain the central bank’s position directly to the voters and face questions over monetary policy.

For the markets, we can expect no hint of a change in policy from either today’s appearance or February 7th. The US central bank is going to maintain its QE2 program until they are assured of sustainable US employment growth and an increase in inflation. If job growth doesn’t accelerate very soon, a market correction will occur sooner as the negatives from European debt, US foreclosures and US debt ceiling will manifest earlier than Q2.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.