When he declared "inflation is running at rates that are too low" last week, Federal Reserve chairman Ben Bernanke did a lot more than just pave the way for more quantitative easing, says Todd Harrison, CEO of Minyanville.com. The Fed chairman's use of the "d-word" (deflation) is "an admission of defeat" by the central banker, Harrison says. "It's a watershed event."
Bernanke's dovish tone was notable (even for him): "A modestly positive inflation rate also reduces the probability that the economy could fall into deflation, which under some circumstances can lead to significant economic problems," he said in a speech at the Boston Fed.
But whether it proves to be a "watershed event" remains to be seen. Thus far, the financial markets have taken Bernanke's speech with a grain of salt and a dash of optimism about prospects for QE2. Monday, the Dow rose TK to Tk while Treasury prices rose, sending the yield on the benchmark 10-year note down to TK.
But the Fed is "pushing water with a fork," Harrison says, among many who believe additional monetary stimulus will have little (or no) impact on the ‘real' economy. Furthermore, Bernanke is putting the Fed's credibility at risk by essentially doubling-down on the initial $1.25 trillion QE bet, he warns. "It's a pretty scary situation."