Brian Sozzi Discusses Bernanke's Options

Brian Sozzi of Wall Street Strategies is out with a research report discussing Federal Reserve Chariman's Ben Bernanke's potential opens for more easing.

In his report, Sozzi writes, "The only reason the market has not plunged into an abyss is that investors continue to look forward to a revival of extraordinary Fed accommodation. If Bernanke were to state today there are still too many risks to implementing a range of tools (or specific tool) to improve execution on the Fed's dual mandate, the market would head right back to the August 8 lows. I wonder if that hypothetical retest would not be healthy, finally depicting valuations as to where the economy is rather than it artificially could be under the thumb of the Fed. The quicker the market is allowed to function on its own, the quicker we perhaps exit the grips of the Great Recession once and for all."

Sozi says that it is hard to think that at the next FOMC meeting later this month that Bernanke and the FOMC will not do some kind of easing. He goes on to say that mixed economic data is not helping reduce the unemployment rate and spark inflation.

Sozzi goes on to say that he sees the Fed doing three things. Operation Twist, described as "where the Fed buys long-dated Treasuries to bring down interest rates to spur economic activity (refinancing, home buying, etc.)." The next would be Operation Inflation, which Sozzi describes as, "[the] Fed would reduce or eliminate a 0.25% interest rate it currently pays banks that keep cash on reserve with the central bank." Sozzi said that he vies this as dangerous, and could cause bubbles in a variety of asset classes.

The last thing he thinks may happen is what he calls Operation Jawbone. This is described as, "The use of highly specific language by Fed officials to express policy objectives, say as it pertains to inflation targeting or caps on medium-term rates."