“Economic growth has continued at a moderate pace so far this year,” began Federal Reserve Chairman Ben Bernanke’s testimony before the Joint Economic Committee on Wednesday morning. “Real gross domestic product is estimated to have risen at an annual rate of 2-1/2 percent in the first quarter after increasing 1-3/4 percent during 2012. Economic growth in the first quarter was supported by continued expansion in demand by U.S. households and businesses, which more than offset the drag from declines in government spending, especially defense spending.”
Wherever Bernanke goes, he can’t escape federal fiscal policy. The federal deficit and growing debt crisis have defined the post-crisis political environment in America. Ideological budget warfare has given birth to the sequestration spending cuts, which are arguably the largest drags on U.S. economic growth. Combined with the expiration of tax holidays and explicit tax increases, federal fiscal policy has co-dominated economic conversation in the U.S. alongside the Federal Reserve’s monetary policy, so it’s unsurprising that Bernanke would include it in the highest-level overview of the current economic situation.
The issue that Chairman of the Committee Congressman Kevin Brady (R-TX) pressed Bernanke the most about was the issue of when and how the Fed will exit its quantitative easing program. This question has been at the forefront of Mr. Market’s mind for pretty much the duration of the post-crisis equity bull run, because the Fed’s various QE programs have proven to be a tremendous stimulus for stocks. Without it, the entire economic landscape changes. When purchases begin to end, traders and investors will have to edit their strategies accordingly.