July 19, 2006
Bernanke's latest testimony
A more optimistic assessment from the Fed chair than I had been expecting.
The slowing of the housing market may restrain other forms of household spending as well. With homeowners no longer experiencing increases in the equity value of their homes at the rapid pace seen in the past few years, and with the recent declines in stock prices, increases in household net worth are likely to provide less of a boost to consumer expenditures than they have in the recent past. That said, favorable fundamentals, including relatively low unemployment and rising disposable incomes, should provide support for consumer spending. Overall, household expenditures appear likely to expand at a moderate pace, providing continued impetus to the overall economic expansion.
Although growth in household spending has slowed, other sectors of the economy retain considerable momentum. Business investment in new capital goods appears to have risen briskly, on net, so far this year. In particular, investment in nonresidential structures, which had been weak since 2001, seems to have picked up appreciably, providing some offset to the slower growth in residential construction. Spending on equipment and software has also been strong. With a few exceptions, business inventories appear to be well aligned with sales, which reduces the risk that a buildup of unwanted inventories might act to reduce production in the future. Business investment seems likely to continue to grow at a solid pace, supported by growth in final sales, rising backlogs of orders for capital goods, and high rates of profitability.
Bernanke predicted a slowing of economic growth, but suggested that such slower growth would represent "a pace roughly in line with the expansion of its underlying productive capacity." From the standard lectures that I'm sure Bernanke has given in his macroeconomics classes many times, trying to use monetary policy to produce any faster economic growth than that would clearly be a mistake. I read his statements as signaling that the economy is slowing, but he's comfortable with that.
He similarly described inflation as an important concern, but a manageable one:
The recent rise in inflation is of concern to the FOMC. The achievement of price stability is one of the objectives that make up the Congress's mandate to the Federal Reserve. Moreover, in the long run, price stability is critical to achieving maximum employment and moderate long-term interest rates, the other parts of the congressional mandate.
The outlook for inflation is shaped by a number of factors, not the least of which is the course of energy prices. The spot price of oil has moved up significantly further in recent weeks....
FOMC participants project that the growth in economic activity should moderate to a pace close to that of the growth of potential both this year and next. Should that moderation occur as anticipated, it should help to limit inflation pressures over time.
Overall, it sounds like he thinks the economy is right about where he wants it. Perhaps one more rate hike, and that's it, consistent with the market consensus.
Personally, I'm a good deal more concerned than Bernanke both that the slowdown could turn into a recession and that the inflation of the last six months could become more firmly established. Nevertheless, those twin fears would lead me essentially to the same policy decision-- no more than one more rate hike, not because I like where we are, but because anyplace else could be much worse.
gold gained 2.4%,
and the S&P500 shot up 1.5%:
I'm inclined to attribute these moves in part to the bird watchers, who'd talked themselves into the idea that Bernanke would do some tough talking on inflation today in order to establish his hawk credentials. These bird watchers then found themselves forced to undo yesterday's speculation as Bernanke today once again surprised them by being so reasonable.
Posted by James Hamilton at July 19, 2006 09:45 AMdigg this | reddit
It amazes me to see this 'doviest dove from doveville' dance following the two inflation prints of yesterday and today.
Actually, it does not amaze me.
I believe we have here an Arthur Burns, not a Paul Volker. Looking for some way to remeasure.
The markets will decide, and soon.
Many of us are weary of the never ending con game played with our savings.
Posted by: esb at July 19, 2006 10:26 AM
Maybe its really strong earnings pushing S&P500 up. I agree with esb, though; the Fed is not achieving price stability, it is threatening it. Hopefully a temporary anomaly.
Sure beats a sharp stick in the eye. Or those surprise FOMC rate changes. Could be worse. Sure was, not too many years ago.
Posted by: caveatBettor at July 19, 2006 12:20 PM
It's official. Ben's an idiot.
Posted by: quiz at July 19, 2006 12:32 PM
That said, favorable fundamentals, including relatively low unemployment and rising disposable incomes, should provide support for consumer spending.
Can someone explain to me how sub-inflation median wage growth and a decaying retail picture is consistent with "rising disposable income"?
I have a hard time believing Bernanke is even speaking from bad data. This just seems dishonest to me.
Posted by: Aaron Krowne at July 19, 2006 02:08 PM
As of now the market no longer expects the fed to hike. Although chance of the Aug hike were around 70% this morning. The market thinks they will pause in Aug and hike in Sep. This makes no sense to me.
Posted by: vincentm at July 19, 2006 02:14 PM
Nothing more than a silly pep talk that leftout all the important information. Those cocktails don't last long.
Bernanke is simply delivering Greenspan's plan. With Trillions of debt into foriegn holdings, Bernanke is trying to run a inflationary policy that reduces the national debt in real terms at the expense of the bond holders.
You also have the "controlled" devaluing of the currency which was another Greenspanian move to pay off trade debts by making foriegners get more interested in American exports.
Hence, BB is trying to step by step to take the Real Estate industry "out" because
1.To many people are wasting their time in that field
2.They should be doing something better
Thus a "soft landing" in 2007 is actually another minor recession(though Ben didn't tell Congress that) then 2 year recovery(08-9) then 2010-XXXX the next 'bubble' boom...........at least in Ben's visionary world.
Things never go that easy, especially in this climate in underestimation.
Posted by: Johnson at July 19, 2006 06:01 PM
My 2 cents... I didn't hear anything that hasn't been said for months, and in light of the CPI data this morning, don't really understand the rally today in equities. To me it didn't make sense given that gold also rose and the dollar declined. Also, the market started going up today at 9:30, then spiked decently a couple minutes prior to the release, then rocketed exactly at the release. It didn't seem like equities cared so much what he said as long as the release was out. I know equities don't do well in an inflationary environment, so what gives?
Also, the S&P 500 hit its high in May at 1326. It now sits at 1260. I must say that the high in May was a very optimistic one given that oil just started its latest move then and housing was showing noticeable signs of slowing. What I have a hard time understanding is the bullish argument now, given that we are only 66 points off the high and growth is slowing.
Lastly, I don't understand what everyone wants to hear from BB, or perhaps what they think they are hearing. He inherited Greenspan's monetary policy midstream, and is now just executing based on the data. I guess I'm just bothered by the pundits on CNBC all day who have to hear BB interpret the data they have been getting all along, when they could just as easily have arrived at the same decision as BB.
Again just my thoughts,
Posted by: Mike at July 19, 2006 06:58 PM
The Bernanke view of inflation appears to be (1) trust us, its not really really here yet (2) and if it is it will simply self-correct so a significantly restrictive monetary policy is not (or never) necessary (3) if it is here and does not self-correct then it can be handled by changing the methodology of measurement, so can we just turn off the lights, take a pause here and sing along to that best of all possible songs, 'Don't Worry, Be Happy.'
Posted by: esb at July 19, 2006 07:01 PM
When all asset classes move up together it can indicate that we are swimming in a sea of liquidity. The perception of the markets today is that BB has not the intestinal fortitude to drain the swamp.
Posted by: esb at July 19, 2006 07:12 PM
I think the markets are looking for guidance from BB while all he is doing is giving us a lecture in macroeconomics. I received a research report today saying that BB commited to a pause. In fact BB is saying that he will do whatever will be appropriate once all the data are available. He is giving no guidance whatsover while the markets think they have been given some guidance. Market action today made no sense to me.
He is a brilliant economist and everything he said is pretty much on the ball. Unfortunately most traders skipped their macro courses. He is not an idiot as quiz suggests above. On the other hand, the trades who rallied the bond market to the tune of 10bs may be idiots.
Now what about this: That said, favorable fundamentals, including relatively low unemployment and rising disposable incomes, should provide support for consumer spending. This just simply means that he expects compensation to raise because the job market is fairly tight. Rising wages are a likely outcome of a tight labor markets like the one we have now. What do you find dishonest about this Aaron?
Also I think it is wrong to label BB a dove or a hawk for he is neither. He is evaluating the economy without a bias. Why should he or anyone view the data with a bias one way or another? Lets put the birds to rest once and for all.
Posted by: vincentm at July 19, 2006 07:42 PM
That may be the problem, the labor market ISN'T tight at all, if the government is understating labor to support Bush's agenda, the fact is, this is not a time to take everything at face value.
Posted by: Johnson at July 19, 2006 10:06 PM
The lead editorial of the Thursday, July 20 WSJ expresses strong concern regarding the doviness of BB.
Friends, when the 'growth at any cost' Wall Street Journal editorial staff is worried about BB being a dove, you should worry as well.
As Kingfish would say to Andy, 'We's in a whole heap a trouble here Andy!' And that may be the understatement of the (relatively young) millenium.
Posted by: esb at July 20, 2006 12:19 AM
The market is still pricing in a 65% chance of a Fed rate hike to 5.5% in August, which is down from 90%, but still favors a rate hike none the less. That is 18 in a row, so maybe it is time to change the language even though headline inflation is still a heady 4.3% even if core is a little less at 2.6%?
Think the stock market rallied because as per the Merrill report two days ago, 60% of all fund managers were decidely negative, so the market was positioned for a surprise? Given decent numbers announced by banks, industry bell weathers like GE, etc. their share prices were getting hammered despite growth in earnings and sales. So again perhaps the market was just getting a little too pessimistic and setting itself up for such a testimony?
We'll learn more today?
Posted by: MrBill at July 20, 2006 12:57 AM