The markets were up in anticipation of his remarks but sunk after them. However, they have rebounded again for now.
"While some Washington leaders demanded Tuesday that the Federal Reserve come through with more stimulus, the reality could be that it has run out of ways it can help."
Ohhh! That's got to hurt. He seems to be denying Sumner here when Bernanke says 'Hey I'm no superman. Congress needs to get its act together.'
"What if Bernanke does greenlight QE3, only to find that the action does little to spur growth? The Fed's most recent measure — Operation Twist, in which it bought short-term debt and sold longer-dated securities in a nearly equal amount — did little to assuage fears of another recession."
What?!! QE3 not work! Bite your tongue! That is not possible according to the MMers. What about Chuck Norris?! Interestingly some in Congress got a little tough on Bernanke today, particularly, Chuck Schumer:
"Fed Chairman Ben Bernanke gave his annual address to Congress on Tuesday and encouraged lawmakers to resolve their fiscal differences."
"Instead, he faced challenges from some — in particular New York Democrat Charles Schumer — who want more central bank action. Schumer called the Fed "the only game in town" because of Washington gridlock and urged Bernanke to "get to work."
There are some competing theories why the Fed is not doing QE3, at least, not yet:
"The question in my mind is, is he not stepping up with another program in any quick fashion because they're starting to wonder if it's going to have any impact? Alternatively, are they not stepping up because when they look at the data they think, 'It's not that bad,'?" says Jim Paulsen, chief market strategist at Wells Capital Management in Minneapolis. "Maybe it's some of both. But does anyone need any more excess bank reserves?"
So is it that he thinks it's not that bad-or is waiting to see if it gets worse-or is it that he thinks it really is that bad but worries that it will have a blunted effect? For there are certainly those who think that QE either has little impact or that it's impact is subject to the law of diminishing returns.
"Nothing is being done to promote the real economy and that's the real issue," Mohamed El-Erian, CEO at bond giant Pimco, told CNBC's "Squawk Box" program. "I feel sorry for Bernanke because the data is telling him he should be more active but there's a recognition that his policies are less effective."
Then, there are the boobirds-AKA, the inflationistas. They fret over the idea that we've already seen "unprecedented money printing", that the monetary base has blown up and that the inflation hobgoblin is going to make its appearance any day now. Yes, there are those who think we're about to suffer "galloping inflation", and, yes, the famous "stagflation."
"We liken it to drug therapy, where clients are put into remission," says Quincy Krosby, chief market strategist at Prudential Annuities in Newark, N.J. "But people know that at some point your body starts to reject the therapy and you're always hoping there's another drug and another innovation that keeps you going until they find a cure."
"The trouble is, there's only so much chemotherapy and radiation a body can take."
"Bernanke has talked about the stock market as the transmission mechanism for monetary policy. It helps breed confidence and confidence breeds more confidence," Krosby says. "But the stock market is up. So this is where the dilemma is...because he knows that there are structural elements that are still impeding growth."
"More maddening for QE opponents is that the data generally is hinting at an economy that is showing some signs of growth but continually running into political roadblocks impeding the way."
"All of that excess liquidity in the economy also could lead to inflation, which would be exacerbated by more QE."
More and more there are Chicken Little hues and cries about the coming Fiscal Cliff:
"with the Fed already holding interest rates near zero, American corporations and banks awash in cash and the central bank's balance sheet near $3 trillion, the Capitol Hill stalemate over deficit reduction looms as the economy's much bigger obstacle."
So there are certainly enough narratives. From my standpoint, I don't see how inflation is even a mild worry right now. I think the inflation phobes are all wet. As to the fiscal cliff, I think that whole worry is overdone. I don't think that's driving the train at all, and imagine that some deal will be made the content of which depends on what happens in November.
As for QE, I don't see it as in any way leading to general inflation. If anything, the MMT-rather than MM!-critique that it might provoke some asset price inflation may have some merit. I was just reading a piece in CNBC yesterday about how the NY Fed did a study that shows that the Fed is responsible for 50% of the market moves over the last 11 years.
But mostly, the MMT theory is that QE will do little good rather than a whole lot bad. MMT does agree that it tends to lead to rallies in the equity and commodity markets but that it doesn't have much spillover effect.
The Market Monetarist gloss is that expectations are king. The market judges not so much QE in its own terms as what it says about the Fed's overall policy stance. So MM and MMT agree that QE is not inflationary but the disagreement is whether or not it has much in the way of positive effects.
Recall that Steve Waldman had called the two heterodox schools "frenemies."
P.S. One more competing theory about Bernanke is that he doens't want to do anything stimulative prior to the election, possibly to hurt Obama/help Mitt Romney.