Bernanke the Shrink

 | Mar 22, 2012 | 7:30 AM EDT
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What is better? Actually getting help during a crisis, or the perception that help is on the way if necessary? I believe it's the latter, especially as far as how it relates to perception and sentiment. Consider the "full faith and credit of the U.S. government." (You can stop laughing now -- I'm just making a point). That implied guarantee is often good enough for others to buy U.S. debt (again, stop laughing).

The continued talk about a third round of quantitative easing from the Fed might not come to pass. The economy may again be growing at a pace of 2.5% to 3% this quarter, so there's no need for added liquidity. Look at the dollar today -- against a basket of major currencies, it's stronger. Certainly a drop in the buck would imply more easing and rising inflationary pressure is on the way. But it's not happening -- gold confirms that, too.

To wit, the challenges are still present, and clearly Fed chairman Bernanke is aware of them. I find it hard to believe he will give up the market gains achieved over the past few years. However, the threat of some action may have pushed aside the fear of an economic collapse or even recession. Now, some may believe the easing did occur with the flood of liquidity from the euros. But if you look at the euro via the CurrencyShares Euro Trust (FXE), you'll find it's rather stable relative to the dollar and other currencies -- so if there really was a flood of liquidity, it certainly hasn't hurt the euro or created a great deal of inflation.

So, instead of the QE 3 many were expecting, we got PE: psychological easing. Look, the Fed has become a master at psychology. Managing expectations and fear has become a primary function these days. What the central bank actually does is not as important as how they prepare the crowd. While they are intent about transparency, make no mistake: Not everyone in the Federal Open Market Committee thinks alike. The constant chatter puts everyone on edge, and at the end of the day the Fed is responding to the data and trying to at least keep up with the changes and pivots in the economy.

The mandate of price stability with low inflation is still consistent with the Fed's policy -- we can argue the finer points of that endlessly, but it is what it is. As the economy improves, job growth trends continue and other regions breathe a sigh of relief, the words of the Fed become ever more important than the action.

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