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As Economy Wilts, Investors Await Bernanke Speech

By    |   Thursday, 26 Aug 2010 04:17 PM

Investors are waiting with baited breath to see what Federal Reserve Chairman Ben Bernanke has to say in his speech about the economy at a Fed symposium Friday.

It will be his first public remarks since the central bank’s decision earlier this month to buy Treasury securities with the proceeds from its maturing mortgage bonds. That will keep the Fed’s balance sheet at $2.05 trillion, avoiding a shrinkage of its quantitative easing program.

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After this week’s housing data, some economists are growing more worried about the possibility of a double-dip recession and deflation.

Existing home sales plunged 27 percent in July from June to at least an 11-year low. And new home sales dropped 12 percent in July to at least a 47-year low.

Economists now expect that second quarter GDP growth, originally estimated by the government at 2.4 percent, will be revised down to 1.5 percent Friday. That’s a far cry from the 3.7 percent expansion in the first quarter.

Star economist Nouriel Roubini sees a 40 percent chance for the economy to slip back into recession, and Mark Skousen, a columnist for Newsmax’s Franklin Prosperity Report, agrees.

Fed policy makers are split in their approach to the problems. Some want to increase qualitative easing, while others don’t.

Into this maelstrom steps Bernanke.

"The chatter you're getting around policy right now is such a cacophony," Ethan Harris, chief economist at Bank of America-Merrill Lynch, told The Washington Post.

"There's just a bunch of wildly different views being presented from both inside and outside of the Fed, and that is confusing markets."

Some of the discord stems from the uncertain state of the economy. Honest minds can disagree as to how much danger there is of a double-dip recession.

In addition, Bernanke, a former Princeton University professor, has no problem letting the differences of opinion among Fed officials out into the open. Where his predecessor Alan Greenspan sought to rule with an iron fist, Bernanke leans more toward collaboration and consensus.

"He sees an unusually uncertain time and he puts his Socratic professor hat back on," an official familiar with Bernanke told The Wall Street Journal.

"He's comfortable with democracy around the Fed. His view is that is going to help him get to a better judgment."

But Bernanke will have to erase worries that divisions within the Fed will render it impotent.

"He needs to overcome this idea that the Fed is paralyzed, either because they don't have the tools to succeed or because they don't all agree," Harris said.

"He will need to admit the recent weakness in the data, justify the action they took at the last meeting, yet not be alarmist and sound desperate. That balancing act will be tough."

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Investors are waiting with baited breath to see what Federal Reserve Chairman Ben Bernanke has to say in his speech about the economy at a Fed symposium Friday. It will be his first public remarks since the central bank s decision earlier this month to buy Treasury...
ben,bernanke,speech,economy
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2010-17-26
Thursday, 26 Aug 2010 04:17 PM
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