the Fed at a crossroad

Plenty of political drama in Europe today that is only rivaled by the daily verbal barrage coming out of Obama's debt ceiling meetings. I was initially hearing that EU leaders are expected to give their approval before next week to a burden sharing agreement with private holders of Greek debt. Later I heard contradictory reports that Eurogroup plans to give Greece enough money to buy back its own bonds in the secondary market at an average of 50% of its face value. This would constitutes as a voluntary haircut and would render the participation of private sectors unnecessary. In any case I see Greece remaining as fragile as ever.

The other big story was Bernanke's testimony which turned out to more balanced than expected. On the hawkish side he seemed to discount the recent rubbish payroll numbers, attributing the weakness to temporary factors. On the dovish side Bernanke did not dissuade notions of further QE or other stimulus. Upon further questioning, the chairman emphasised the same point.

It's fascinating that he failed to rule out QE3. I would see initiating another round of buybacks as being rather silly and this is a feeling probably echoed by many. This time last year I asked Alan Greenspan in casual conversation whether he thought there should be any monetary stimulus at all and he gave a resounding no. last week I saw him again in Aspen. He laughed when I brought up the stimulus topic and he implied that the QE2 was rather pointless and unfortunately I agree. QE1 and 2 spent over 1.3 trillion USD and apart from inflating asset prices, I'm not sure it managed to achieve a whole lot more. The unemployment rate failed to fall in any meaningful manner so the message is there.