The big story yesterday was supposed to be Ben Bernanke’s signal to the markets about future Fed policy — whether he’ll scale it back, or just go on printing money to keep interest rates super-low and inflate the economy.
But that’s basically a false drama, fueled largely by jittery traders who know their life blood could be in danger when the Fed finally starts to raise rates and roll backits “quantitative easing” program of buying massive amounts of bonds to infuse the economy and the markets with cash.
No, the real story is that Bernanke — and whoever replaces him in coming months — may not be able to afford any major course change.
Sure, we may see some “tapering” of the easy money later this year, as the Fed warned yesterday. Bernanke himself said the money-printing spree could come to a complete end sometime next year if the economy continues to grow.
But this is President Obama’s economy, burdened by rising taxes as well as ObamaCare and other new mandates. That means it needs all the help it can get — and the Federal Reserve is increasingly willing to accommodate these needs.
In other words, easy money may be here to stay, and along with it all the risks it carries — risks like massive inflation and asset bubbles. The president signaled as much earlier in the week when he said in an interview that Bernanke’s days at the Fed are numbered. Obama is sure to tap a successor who’s even more “dovish” on inflation and other risks of easy money.
We’re not even likely to get Tim Geithner, who has a deep understanding of the markets, as the new Fed chief. Sure, folks like Blackrock CEO Larry Fink hoped the former New York Fed president and Treasury secretary would get the job. But Geithner has told people he wants to go into the private sector so he can “make money,” as one senior Wall Street exec put it.
That leaves Janet Yellen, now Fed vice chair, as Obama’s likely choice. And she’s even more dovish than Bernanke — more committed to keeping unemployment low than to the Fed’s other mandate of taming inflation.
She’s plainly an Obama favorite. One financial executive who knows their relationship says, “They both complete each other’s sentences.”
For all the conservative complaints about Bernanke, his policies haven’t led to disaster yet. And while it’s debatable whether he’s truly independent of the president, there seems to be no debate about Yellen’s allegiance. So the nation’s central bank could well be transformed into the central bank of the Obama administration, printing money in a desperate bid to cushion the impact of his various big-government projects — especially ObamaCare, which is due to hit hard come January.
What if the risks do finally come due — if we start getting serious inflation, or an asset bubble? The Fed might not have much choice other than to raise rates immediately and cut off the easy money.
And beware — the bursting of asset bubbles is always ugly. A mini bubble burst in 1994, and Orange County, Calif., fell into bankruptcy because of ill-timed market bets. A much bigger bubble burst in 2007 and 2008, and you know what happened then.
But neither Bernanke nor Yellen seems to think inflation is that big of a deal, or that any asset bubbles now forming can’t be handled.
If the Fed chief were worried, he might have said so yesterday. Instead, he merely signaled that the economy is improving; he showed no inclination to raise short-term interest rates before 2015. In fact, his plan to scale back and possibly end the bond-buying is purely contingent on the success of the Obama economy, and we all know how that has fared over the past four-plus years.
In fact, one reason inflation’s still low is that the Obama economy is still slow — it may be better than before, but that ain’t saying much. This remains the slowest recovery in modern history, and precarious in many ways, with plenty of underemployment. Most economists don’t see growth rising much above 3 percent.
And with the economy set to take more hits from ObamaCare, new financial regulations under Dodd-Frank and the president’s eternal push for higher taxes, you can bet that (even with a little “tapering”), neither Ben Bernanke nor Janet Yellen will mothball the money machine anytime soon.
Charles Gasparino is a Fox Business Network senior correspondent.