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By Jason Stipp and Robert Johnson, CFA | 05-23-2013 09:30 AM

Johnson: Fed Still Has Room to Run

The Federal Reserve has leeway to remain stimulative, given lackluster economic growth amid current export and fiscal policy headwinds, says Morningstar's director of economic analysis.

Jason Stipp: I'm Jason Stipp for Morningstar.

Fed testimony and statements yesterday, coupled with some negative economic news out of China, sent the global markets on a wild ride overnight. Here to offer his insight on some of the Fed statements and the impact on the global economy is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for being here, Bob.

Bob Johnson: Great to be here.

Stipp: The Fed initially testified before Congress, and the markets went up. Then there were some Q&A and some minutes released from Fed meetings, and the markets went down. That got worse overnight as some economic news came out of China [indicating] a slowdown there.

Let's start with the Fed first. Why did we see the up and then the down, based on how the Fed was answering questions yesterday?

Johnson: I think Bernanke was very clear in his statements before Congress, and the thing that everybody took solace in and what put the market up so much initially was that he seemed to be saying, we're not going to prematurely withdraw support. If we do, and do that prematurely, that will slow the recovery. In fact, it may even turn the recovery into a recession.

So, using language that strong made people think that, wow, there is no chance that rates are going to be going back up or the Fed is going to stop their bond buying [anytime soon].

Stipp: So the implication there was the economy is still somewhat fragile and still weak, and this stimulus will continue. So it's a little bit of good news and bad news at that point. But then later when he was answering Q&A questions, he was asked if some of the stimulus might be tapered by the September timeframe, and after some hemming and hawing, he said, it's possible that it would, and the markets did not like that.

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