Reply #1: WrapUp by Mike Hartman [View All]

[ozymandius]

CHAIRMAN BERNANKE MAINTAINS CONTINUITY

Investors and market analysts have been waiting patiently for the new Chairman of the Federal Reserve, Ben Bernanke, to hear his testimony before Congress as they search for clues to determine the direction of interest rates and asset prices. Overall it appears Mr. Bernanke is demonstrating a continuation of the same policies we have seen by the Fed under Alan Greenspan. After two hours of testimony, stock prices are flat to slightly lower along with bond prices, the dollar is fractionally higher against most major currencies and commodity prices along with gold and silver are moving lower. The direction of asset prices is consistent with the expectation of higher interest rates to come.

Mr. Bernanke says the economic expansion in the U.S. remains on track, inflation expectation remain contained and he agrees with the last FOMC statement that some further firming of monetary policy may be necessary. The Fed mantra remains unchanged as they seek a smooth transition of leadership to create calm in the financial markets and reassure investors that everything is under control. Our new Fed Chairman cited the slowdown in the housing market as a potential problem for future economic expansion, but conditioned his remarks by saying that he expects a moderate softening in real estate to be more likely than a sharp contraction.

After earning the nickname “Helicopter Ben” by his comments of dropping money from helicopters to fight deflation, he came across today as more hawkish toward inflation. This is generally not what the markets wanted to hear; especially the bulls that would like to see stock prices continue higher. He identified high energy costs as a possible trigger to higher inflation along with elevated rates of resource utilization. The unemployment rate is calculated to be 4.7%, its lowest point in more than four years and a further decline in the rate could trigger wage inflation. While we would all like to see our paychecks get bigger, it will make the U.S. less competitive relative to global production costs.

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Let’s Hear It for the New Economy!

Mr. Bernanke continues with the same Fed mantra that the inverted yield curve (two-year Treasuries with a higher yield than ten-year Treasuries) does not indicate a near-term slowdown in the economy. He sounds like another new-waver economist that is saying “this time is different.” I don’t think so! There is a six to nine-month lag time of higher interest rates and a housing slowdown on the overall economy. In the fourth quarter our GDP growth was reported at the very low level of 1.1% growth, slower than the rate of inflation. The Fed is now saying their GDP forecast for this year should come in at the high end of the range. Last July they forecast GDP growth in the range of 3.25% to 3.5% and are reiterating their call for 3.5% GDP growth.

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