Bernanke Learns a Lesson, Dodges Taper Talk
In an incredible feat of oratory acrobatics before Congress, Federal Reserve Chairman Ben Bernanke was able to dodge addressing the specifics on tapering the Fed’s QE program. Whether this was a result of honed ‘Fed speak’ or a failure on the part of lawmakers to pose relevant questions will be left up to market participants to decide. Although the session did not rattle markets as they did on June 19th after the volatile press conference following the rate decision or last Wednesday’s FOMC minutes, today’s Q&A provides some valuable insight.
Mr. Bernanke has obviously grown wary of speaking in any candid nature about particular timetable of tapering. In his testimony today, never once was a reduction in asset purchases mentioned without being followed by a kind reminder that rates will stay low and accommodation will remain for a considerable period of time. This general theme to the testimony and Q&A session fueled the fire by sending the S&P 500 up 0.3%.
Chart - Created Using FXCM Marketscope 2.0
It should be noted that the two most important takeaways from today are that the Fed will be looking at U.S. data to determine any tapering and that Mr. Bernanke ‘will be watching’ to see if mortgage rates affect the housing market. As lawmakers pressed him about steep rises in mortgage rates over the past few weeks, Mr. Bernanke indicated that he’d be watching to see whether those upticks in rates have an impact on the housing market. Although the Dollar moved lower as a result of today’s comments, momentum has not built behind an unwinding of the currency due to the belief of a delayed withdrawal of support. Data will take the lead on speculation moving forward as a stable pace of expansion would support the Fed statement that resulted from the June rate decision. Alternatively, any evidence of a faltering recovery due to higher mortgage rates could push the greenback lower and equities higher as markets prepare for more QE fuel on the raging fire that is the current market.
Notable Bernanke Remarks:
- If economy growing on its own will not need the support of the central bank
- The economy is growing but at a moderate pace
- Economic data has ‘been a little better’
- Fed expect the economy to pick up the pace later this year
- US could attain a jobless rate in ‘the fives’, approximately 2 percentage points cyclical
- There are ‘a lot of different views’ amongst the Federal Open Market Committee
- Accommodative policy is needed for the foreseeable future
- QE is aimed at achieving more short-term momentum
- Fed cannot guarantee it can prevent a bubble, but does not see one currently
- Fed is being transparent about the taper, but conditions for taper are arbitrary
- Quantitative easing is not seen disrupting the Treasury market
- Not seeing any ‘problems’ in the Mortgage-backed securities (MBS) market
- Fiscal Policy is too focused on the short-run
- Not lifting the debt limit could cause an economic ‘shock’ and would be ‘disruptive’
Looking ahead, there is another round of testimony scheduled before the Senate. Bernanke is likely to repeat many of his beliefs and assessments from today’s meetings, but there is nevertheless the risk of more explicit forecast from his commentary or elicited from a well-placed question.
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Written by: Gregory Marks, DailyFX Research Team
Written by: John Kicklighter, Chief Strategist for DailyFX.com