Bernanke Admits He’s Clueless On Economy’s Soft Patch

In his second post-FOMC press conference, Fed Chairman Ben Bernanke touched on every topic, admitting that the recovery was weaker than expected and that beyond temporary factors like supply chain disruptions in Japan and high energy prices, he was at a loss as to what was causing the soft patch.  In a Q&A session with reporters, Bernanke said a disorderly default in Greece would have significant effects on the U.S. economy, while adding that the Fed still had several tools at its disposal to pump up the economy.

If the central bank actually does have more in its tool kit, they will be deployed in a weakening economy. Just before Bernanke spoke the Fed issued its revised forecast, dulling growth estimates for 2011 and now calling for gross domestic product to expand between 2.7% and 2.9%.

Bernanke’s statements rattled the markets, which had remained virtually flat for most of the day.  Equities sold-off as the Chairman began talking, with all three major U.S. equity indices closing at their lows for the day.  The Dow shed 80 points or 0.7% to close at 12,110 in New York, while the S&P 500 fell 8 points or 0.7% to 1,287; the Nasdaq lost 18 points or 0.7% to 2,669.

On the bond front, yields on benchmark 10-year Treasuries hit their lows for the day just before the release of the FOMC state, only to bounce up to a few basis points from 3%, marking a sell-off as prices move opposite yields, and playing into Bill Gross‘ investment thesis. (Read PIMCO’s Bill Gross Shorts Treasuries As Experts Eye Inflation).

With markets at a crossroads, amid a cooling economic recovery and a dangerous Greek crisis threatening the euro and the global economy, reporters grilled Bernanke and asked many of the right questions.

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