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Bernanke Under Fire: Why an Early Tuesday Turkey Could Shake Up Markets

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On November 23, the Fed will release the minutes of the FOMC meeting held earlier this month as Bernanke steps up defense of QE2 in the face of growing criticism.

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Editor's Note: This article was written by Lawrence G. McDonald,  president of McDonald Advisory Group and a partner with DC Tripwire.

I kept hearing Thursday from some of my well-connected friends on the Street, "Fed Chairman Ben Bernanke is meeting behind closed doors with Senate banking members today about QE2." I said to myself, "In my lifetime have we ever seen a more politicized Fed? Have we ever seen a Fed Chairman more publicly challenged by Capitol Hill?"

It's clear Bernanke is trying to head off a two-front war; with battle being waged within Federal Open Market Committee FOMC and his new foes in Congress. Bernanke's under friendly and unfriendly fire.

Could Tuesday be Turkey Day for the financial markets? I think there's a good chance we see some serious "dirty laundry" aired, which could increase volatility in what normally should be a quiet, holiday-shortened week.

You see this Tuesday, November 23 at 2 p.m., the Fed will release the minutes of their Federal Open Market Committee meeting held earlier this month.

Chairman Bernanke and other Fed officials are stepping up their defense of QE2 in the face of growing criticism from several quarters.
While most press attention has been placed on rising congressional criticism, I think the greater threat to the FOMC's accommodative strategy remains the internal disagreements within the FOMC itself. We could see this up close and personal this week on Tuesday when the minutes are made public.

Chairman Bernanke delivered a strong defense Friday of the Fed's QE2 strategies in front of an international audience at the European Banking Conference in Frankfurt, Germany. In wide-ranging remarks, Bernanke highlighted the importance of rebalancing economic growth between the advanced and emerging market economies. He also raised the issue of appropriate exchange rates.

Bernanke also attempted to reframe the QE2 debate by stating that using the term "quantitative easing" to refer to the Federal Reserve's most recent policy action is inappropriate since the Fed is not seeking to change the quantity of bank reserves and is instead focused on affecting the yields on the acquired securities and, via substitution effects in investors' portfolios, the yields of a wider range of assets. Perhaps because of his growing frustration with congressional inaction, Bernanke called for a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits as an important complement to the policies of the Federal Reserve. Bernanke also noted that the possibility of a rise in the US unemployment rate in the near term could not be ruled out.

Restless Natives on Capitol Hill

Chairman Bernanke's remarks come on the heels of increasing criticism of the Fed's actions from political circles. Senator Corker (R-TN) and Rep. Pence (R-IN) head the list of congressional members debating whether to change the Fed's dual mandate of price stability and sustainable full employment. (Note that Bernanke himself has long been an advocate for inflation-targeting. Bernanke would no doubt also argue that QE2 is fully consistent with inflation targeting since actual inflation numbers are below where the FOMC wants them to be and are dangerously close to raising deflationary expectations.) Rep. Ron Paul (R-TX), long a proponent of abolishing the Fed, is set to see an increased oversight role in the Republican dominated House, with a likely subcommittee chairmanship in House Financial Services. Sarah Palin has even gotten in on the act, with a recent speech objecting to QE2 and its possible inflationary impact.
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