Over the past couple of weeks Federal Reserve Chairman Ben Bernanke appears to be on a campaign to say the right things to boost the economy and the markets. It worked on Friday, Aug. 27, and again on Wednesday and major indices posted nice single-day gains each time. But words without action cannot sustain a rally for long. In his Friday comments at a Federal Reserve symposium in Jackson Hole, Wyoming, Bernanke pledged that the Federal Reserve is ready to take steps to strengthen the U.S. economic system if such action is required. While that was comforting to Wall Street, some economists and analysts question whether the Fed really has much leverage left.

In a MarketWatch column on Yahoo! Finance, Brett Arends wrote: “This is the man who four years ago predicted ‘a leveling out or a modest softening’ in home prices. (He also said households were in ‘reasonably good’ financial shape, because their booming house prices were offsetting their rising debts).

“Just over three years ago he said the sub-prime crisis ‘seems likely to be contained,’ adding that he saw ‘some tentative signs of stabilization’ in house prices.

“As late as April, 2008, with the great implosion just months away, he forecast ‘a return to growth in the second half of this year and next year.’ You remember that return to growth we had in the fall of 2008, don’t you?

“Last Friday he admitted the Fed had been as surprised as everyone else by the sharp downturn in the U.S. trade balance in the second quarter.”

And apparently the chairman himself has concerns about the Fed’s ability to stave off additional economic complications. At Jackson Hole he said “In sum, the pace of recovery in output and employment has slowed somewhat in recent months, in part because of slower-than-expected growth in consumer spending, as well as continued weakness in residential and nonresidential construction. Despite this recent slowing, however, it is reasonable to expect some pickup in growth in 2011 and in subsequent years.”

That comment is far from a solid pledge that the economy will see significant gains anytime in the near future. In fact, Henry Blodget wrote this in Friday’s Business Insider: “If you can’t spare the time to read Ben Bernanke’s whole speech this morning, we’ll boil it down to 11 words for you: ‘Yes, the economy’s weak, but there’s not much more I can do.’”

Or consider this commentary from Joe Weisenthal in the same publication: “The most interesting part of Bernanke’s speech to the Fed Symposium is where he discusses the FOMC’s policy options, in the event that weakening conditions warrant more easing. And if you read it, the basic message is: Yeah, we have some options, and none of them is likely to work very well. [He highlighted] three key possibilities, and in each case he makes a very good point why they might not work.”

My personal belief is that no one can accurately predict—let alone control—what the markets or the economy is going to do because there are just too many variables. If officials at the Federal Reserve had known that a financial meltdown was about to occur in 2008, they would have done more to prevent it. The fact is they did not know and they might not have been able to do much anyway. So now Bernanke is trying to put a positive spin on the current situation. But he cannot promise that things won’t get worse, just like the Federal Emergency Management Agency can’t promise that Hurricane Earl won’t slam into the East Coast. All they can do is promise that if the storm hits they will try to mitigate the impact of the damages.

Below is a chart of the New York Stock Exchange (NYSE) Composite over the past year. Wednesday’s big upward move was enough to turn a number of technical indicators positive. For example, the gold line on the top portion of the chart is a 50-day simple moving average (MA). The NYSE is currently above its MA. The bottom portion of the chart is a relative strength index (RSI). The NYSE is above 50 on its RSI. The middle portion of the chart is a moving average convergence divergence (MACD). While this indicator is still below zero, it has turned upward and is signaling positive momentum.

So while the economic fundamentals aren’t good, for now stocks have positive momentum.

I added and green line and a red line to the top portion of the chart. For most of the past year, the NYSE composite has traded within the range encompassed by these two lines. And now it is right in the middle of that range. While I claim no ability to predict what the markets will do, it is my personal belief that for the next two months, stocks will probably continue to trade within this range.

The upcoming November election is critical for Congress and the presidential administration. They simply cannot afford any major meltdown of the economy or the markets between now and then. So I think they will use whatever means possible to provide a boost or to at least preserve the status quo for that period. One of the tools at their disposal is the Federal Reserve.

For the next two months, it is likely that Bernanke will be just one of many government representatives telling us that the economy is really better off than we might believe. For example, Rep. Barney Frank, D-Mass., and chairman of the House Financial Services Committee, appeared this week on the David Letterman show and he indicated that the economic situation is improving. These kinds of public appearances can’t sustain the markets indefinitely under a barrage of negative economic data. But it might be enough to help hold things together for a few more weeks. Then all bets are off.
F.S.