Yesterday was a big day for history books. President Obama signed the most elaborate set of financial regulations since the Great Depression into power. Yesterday was also Ben Bernanke’s semi-annual Humphrey Hawkins Testimony. Both came at a time when the markets, investors, and the American public are looking for direction. Recovery strength is uncertain, markets remain hesitant, and elections loom around the corner. Some believe Bernanke stuck to the script by not lending a direction. Some believe he should have given more of a glimpse into the Fed’s actual plan, if there is one. There are those too who believe the Fed is more confused than they let on. In spite of this, my general sentiment about the economy is that we are in a good place-the middle. Strength of growth has waned but likelihood of a double-dip in our economy has also diminished. Economic data do not continue to meet expectations, yet they still reflect strength of the system. The markets have slowed their delusional press upward yet hold solidly the growth reflected in consumers and investors.

Listening to Bernanke’s testimony yesterday illustrates three major issues which largely overlap. The first is, should we fear deflation or inflation? The second is, should the Fed use additional stimulus or is it hindering growth by doing so? The third is, will the increased regulation hinder business or simply add to the deficit and negatively affect long-term fiscal sustainability?

I have long claimed that market confidence is the core of all change, actual or false. Talk of a double dip began when the markets and data began to show signs of pull-back or slowing. We feared losing the momentum gained in the first half of the year as a result of stimulus. But, on the contrary, we should fear rapid growth. Severe upswings are as dangerous, if not more, than severe down-turns. Just as we like when the economy begins to slow and rates are high, the Fed has room to move, we should like the idea that there is potential for growth, rather than imminent inflation due to the economy heating up too fast. In my opinion, the Fed has done a good job here of inflicting the perfect attitude onto the markets. We are still growing, just not so fast. I like this article: Guest Contribution: Double Dip? Seven Reasons Why Not* http://blogs.wsj.com/economics/2010/07/19/guest-contribution-double-dip-seven-reasons-why-not/

Now, I can hear you saying, “But what about unemployment?” As Bernanke stated today, we are seeing a “gradual decline” in unemployment. As the economy grows at a moderate pace the unemployment rate will equally abate. It would take an inflationary scenario to stimulate so much growth as too immediately reduce the American jobless rate. If the GDP data show 2.6%, as estimated, at the end of the month, that will put this year’s growth at the fastest recovery rate in thirty years. The risks of inflationary or deflationary outcomes seem to be contradictory. There is the element of cheap money causing hesitation in banks to lend which makes the Fed an agent of deflation. However, we can all agree, a deflation situation such as Japans is highly unlikely given the unconventional tools the Fed has used and has left to use if the situation warrants. The weaker economic data that came out over the past month prompted speculation of increased monetary stimulus. To this Bernanke answered, “We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.” He also said, however, that the Fed remains prepared to eventually raise interest rates and shrink their record balance sheet. By doing so the Fed has projected into the markets the confidence that it still has the ability to act. Confidence is all it takes.

 The Dodd-Frank Bill, named after two Democrats, Senator Chris Dodd of Connecticut and Representative Barney Frank of Massachusetts, has three main facets. First, it gives the government new authority to unwind failing financial firms that may threaten the entire system. Secondly, it imposes new rules on derivatives markets. Lastly, it creates a consumer-protection agency at the Federal Reserve to monitor everything from home loans to credit cards. The argument has been whether the bill will hinder or protect and promote long-term economic growth. Only time will tell the answer to that as multiple newly formed federal agencies must now begin writing the regulations that will give the framework for enforcing the law.

Bernanke used the words “unusual uncertainty” to describe the state of the markets and the economy yesterday but also said the Dodd-Frank Bill made “significant progress” toward reducing the likelihood of a crisis such as the one have just lived through. What I’ve come away with after watching the Humphrey Hawkins Testimony and the passage of FinReg is that we are right where we are supposed to be. We don’t need to be racing upward in order to prevent falling back.