The Fed's 360 degree door

Today's testimony by Fed Chief Ben Bernanke, as well as the minutes from the latest Fed meeting released later in the day, gave central bankers a door to pursue any number of policy options.

Let me explain. Early today, Bernanke testified before a Congressional committee that a premature tightening of monetary policy would carry substantial risks.

Got it. The Fed won't be paring back on bond purchases anytime soon.

Then, during the Q&A session, Bernanke said the Fed could reduce QE in the next few meetings, but added that it all depends on the data. Hmmm.

Muddy minutes
To make matters even more interesting, the Fed's minutes included this statement.

"A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome."

But the minutes also referred in a number of instances to "downside risks."

So Bernanke is warning against a premature tightening, but a number of participants are expressing a willingness to cut back on bond buys, possibly by June.

Confused? The Fed sure seems divided. Or maybe it just doesn't want to clearly communicate when it might be start to taper off as it is worried the Street would quickly price in any exit.

Bottom line - the Fed has shifted the gravity of its position towards tapering off, but it has kept the door open to any number of policy responses if conditions warrant. It's a policy for all seasons.

Federal deficit? What deficit

OK. So a CBO estimate of a FY2013 federal deficit of $642 billion is still $642 billion. But its $200 billion less than the CBO estimated just three months ago. And it's well below the $1.1 trillion 2012 federal deficit.

So what gives? Simple. Revenues are coming in faster than expected thanks to a "modest-at-best" economic recovery that is putting folks back to work and creating taxpayers. Moreover, repayments by Fannie and Freddie are also helping.

And let's not forget that spending restraint - federal spending will fall for the second year in a row - is also helping to sop up the red ink quicker than anyone thought possible.

At 4% of GDP and falling, the deficit is finally becoming manageable.

The next question - is the CBO estimate still too conservative?

The CBO said last August that the deficit would fall to $641 billion if the country went over the fiscal cliff. Wow! That's one helluva of a miss. But it also highlights the difficulty in forecasting revenues and spending.

At least for 2013, the country was able to extend the Bush tax cuts to 99% of the population and come within $1 billion of hitting the CBO's target.  Let me repeat - all without a cliff-induced recession!

Is the deficit falling too quickly? 
Sounds like an odd question to ask, but pulling cash too quickly out of the economy could slow growth.

So those who favor a more activist government would argue that additional government spending would slow any fiscal drag and create more jobs.

Those who want to see the government get out of the way would argue there is room for more tax cuts, which would unleash additional business and consumer spending.

You make the call.

Stocks - like watching the grass grow

Seemingly inspired by last week’s ‘sigh of relief’ employment report, the major stock market indices topped new milestones in what can only be described as a ‘watching the grass grow’ rally.

Sure, it’s been dull, but who says rising portfolio values have to be accompanied by heightened exuberance. 

Same 'ole, same 'ole 
Earnings season is winding down, and you know it's a slow week when the most important economic report is weekly jobless claims.

But the general themes that have been in place since the beginning of the year - stronger corporate profits, accommodative global central banks, an expanding economy, and very quiet credit markets - were all a part of the equation.

Oh. In case you were wondering, jobless claims hit a fresh 5-year low.

The European Central Bank finally delivers on a rate cut

The euro-zone remains bogged down in a recession, and after a new record for unemployment - 12.1% - and a drop in it's CPI  to a rate of 1.2%, the European Central Bank finally threw in the towel and offered up what I would call a symbolic rate cut of 25 bp to 0.50%.

Whoopee! Sadly, Europe's in a world of hurt, and a 0.25% reduction in its key rate won't solve what ails its economy.

One reason in particular came to light in the ECB's press conference, which traditionally follows its monthly meeting.

ECB President Mario Draghi remarked, and I'll relay his complete statement before commenting, "In the U.S., 80 percent of credit intermediation goes via the capital market. Capital markets rate and price assets in a right or wrong way, but it’s fairly transparent.In the European situation, it's the other way around; 80% of financial intermediation goes through the banking system."

That's a huge problem for Europe, but it highlights one reason the U.S. economy has managed to plow ahead, even if it's at a sub-par pace.

You see, U.S. banks weren't lending during the recession and in the initial stages of it's recovery. In fact, standards are still on the tight side. But access to capital via capital markets provided some lift.

European businesses depend on banks for support, and their banks are under-capitalized and aren't lending. In fact, they'll need to raise hundreds of billions of euros in capital or shed trillions in assets to get capital ratios where they need to be.

That means Europeans will have to navigate a very rocky road in the coming months and years..