THE TAKEAWAY: [Federal Reserve Chairman Ben Bernanke testifies to Senate] > [No hints of further stimulus] > [USD strengthens]
Federal Reserve Chairman Ben Bernanke stood before the Senate Banking Committee today with a prepared testimony on the Fed’s monetary policy. Bernanke gave no indication that the Fed would embark on another round of economic stimulus, reiterating the Fed’s pledge to act if needed.
In his address to the Senate, Bernanke said that progress in reducing unemployment is likely to be “frustratingly slow”, with household confidence remaining “relatively low” and consumer spending growth likely to slow in the second quarter of 2012. Despite a slew of disappointing economic data recently, Bernanke repeated the Fed’s June forecast that economic growth would continue at a “moderate” pace in coming quarters before picking up “very gradually”.
Bernanke also reiterated his concerns that the current fiscal policy will hamper economic growth, saying that planned cuts in federal spending at the end of the year could send the economy back into recession, while the projected long-term growth of spending was “unsustainable”. Overall, the Fed will continue with its wait-and-see approach on its monetary policy and is likely to maintain low rates through to late 2014.
EURUSD 5-minute Chart: July 17, 2012
Chart created using Market Scope – Prepared by Tzu-Wen Chen
With Bernanke giving no hints of further monetary stimulus, the greenback strengthened against its major currency counterparts. The U.S. dollar erased earlier losses against the euro, climbed to as high as $1.2188 during Bernanke’s testimony. At the time this report was written, the U.S. dollar had retraced some of its gains, with the EURUSD pair trading at $1.2252.
Key commentary from Bernanke’s testimony is summarized as follows:
- Repeats Fed prepared to act, declines to specify steps.
- Sees slower consumer spending growth in second quarter.
- Sees 'modest signs of improvement in housing'.
- Manufacturing 'has slowed in recent months'.
- Household confidence 'remains relatively low'.
- Recent economic data is 'generally disappointing'.
- Sees risks from Europe crisis, U.S. fiscal challenges.
- Predicts 'frustrating slow' progress in joblessness.
- Europe officials have resources to resolve crisis.
- Controlling U.S. deficits should be high priority.
- Fiscal policy should account for fragility of economy.
- Reiterates rates likely to stay low through late 2014.
- Reiterates FOMC prepared to ease further if necessary.
- Fed tools still have capacity to support growth.
- Fed will consider extent of deflation risk.
- Fiscal cliff would have negative economic impact.
- Delaying fiscal balance would be 'very bad outcome'.
- If Fed wants to ease, it could buy treasuries and MBS, use discount windows or cut interest on excess reserves.
- Inflation risk is 'relatively low now'. Sees modest risk of deflation.
- Fed comfortable it has tools to unwind policies.
- Fed aims to maintain price stability.
- Ending 'too big to fail' would spur breaking up banks. 'Very important to attack too big to fail.'
- Sees a 'high priority' restoring confidence in finance.
- Fed seeks 'sustainable improvements' in labor market, and is prepared to act if labor market doesn't improve.
--- Written by Tzu-Wen Chen, DailyFX Research
