A week ago we outlined here how and why Ben Bernanke lost a significant vote in the recent Fed Open Market Committee meeting. The vote was not so much to launch immediately QE3 when QE2 comes to an end this month; it was to keep Quantitative Easing as a tool in the Fed’s arsenal of monetary weapons. So far, the mainstream media have not yet realized how significant a shift this is in Fed policy, but other bloggers are beginning to notice, and so is the stock market. Yesterday Chairman Bernanke spoke at the International Monetary Conference in Atlanta, at which he made no mention of Quantitative Easing now or down the road sometime. The stock market certainly reacted to this omission; having traded noticeably higher during the day, the Dow Jones industrial average closed down 19 points, losing most of its ground in the last fifteen minutes of the session when Bernanke began speaking.

Here are some perceptive comments about the speech from Cullen Roche on his Pragmatic Capitalism website:

*His speech was certainly market moving and as reports of the speech hit the wires the equity markets began to reverse on fears that QE3 is off the table. But there was a more interesting tone in his speech today than we’ve seen in the past. The Chairman was exceptionally defensive. In fact, the entire speech is basically an explanation as to why QE2 did not hurt the economy (of course it did).

Warren Buffet warns on U.S. debt.

If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.

This morning the BLS reported that consumer inflation increased +0.1% (seasonally adjusted) in May, (rising 0.3% non-seasonally adjusted). Year-over-year prices have fallen -1.3% into deflation. YoY consumer deflation is only surpassed by 1949 in the post-Depression era.

The first 5 months of inflation data are still in accord with the optimistic scenario I laid out in January:

In the Optimistic scenario, the fiscal and monetary stimuli, together with intelligent new political leadership in Washington, halt the meltdown perhaps by mid-year, and wage reductions remain the exception. In the Pessimistic scenario, the stimuli fail, and wage reductions spread, leading to a wage-price deflationary spiral.

Francis Cianfrocca, a/k/a Blackhedd from Redstate, has started his own blog called Markets and Policy. Although our political opinions are frequently poles apart, his purely economic analysis is excellent, and always intelligent. If you are interested in reading well-done analysis from the "other" side, I highly recommend him.

Needless to say, he is opposed to Obama's stimulus plan, calling it Paris-on-Potomac: