More work to do for the Fed chief

Europe is clearly the big drag and big risk for the global economy and the market. U.S. may be the hope. President Obama's job speech last night looked like a refreshing refocus on the real thing, but he faces a difficult uphill battle to get the package through Congress.

The Fed may be able to do a bit more. Mr.Bernanke has been avoiding specifics in his last two big speeches, but provided a clear sounding board to the White House and to the Congress. The economic recovery is at risk of stalling, and the circus in Congress is making things worse.

Yet, it's troubling that Mr.Bernanke appeared troubled by "exceptionally cautious" households:

One striking aspect of the recovery is the unusual weakness in household spending. After contracting very sharply during the recession, consumer spending expanded moderately through 2010, only to decelerate in the first half of 2011. The temporary factors I mentioned earlier--the rise in commodity prices, which has hurt households' purchasing power, and the disruption in manufacturing following the Japanese disaster, which reduced auto availability and hence sales--are partial explanations for this deceleration. But households are struggling with other important headwinds as well, including the persistently high level of unemployment, slow gains in wages for those who remain employed, falling house prices, and debt burdens that remain high for many, notwithstanding that households, in the aggregate, have been saving more and borrowing less. Even taking into account the many financial pressures they face, households seem exceptionally cautious. Indeed, readings on consumer confidence have fallen substantially in recent months as people have become more pessimistic about both economic conditions and their own financial prospects.

Spending power of a typical household comes from their current income and/or their asset. If their asset is not liquid, they can borrow against it. Both sources are under heavy headwinds, as noted by the Fed chief. How much more can they do?

If Mr.Bernanke cannot get over this, and continues to hold out hope that the households will step up spending miraculously, then we're unlikely to see decisive actions from the Fed. Perhaps this is what's troubling the market.