Fed Chairman Bernanke appeared before the Economic Club of New York on Monday to deliver a speech on the U.S. economic outlook.
As you might imagine, he was not whistling "Zip-a-Dee-Doo-Dah" on the way to the podium. Still, his comments leaned more to the hopeful side than anywhere else.
Considering the Fed Chairman's own view, it is fair to say that he is not expecting a double-dip recession. Nonetheless, he did maintain the position that the weak job market and constrained bank lending will keep the economic recovery from being as robust as many would hope.
Mr. Bernanke spent some added time, too, highlighting the travails of the commercial real estate market and how that poses an elevated risk for the banking industry, particularly for smaller regional and community banks.
That isn't an unknown risk for the market, however, so the warning was taken in stride.
In effect, there were two comments from the Fed Chairman that made the speech, and the Q&A session that followed, worth listening to for market participants.
The first came in the body of his prepared remarks and it pertained to the dollar.
The Fed doesn't make a habit of saying a whole lot about the dollar, yet given the slide in the dollar index, it wasn't lost on traders that Mr. Bernanke made a point of mentioning the foreign exchange value of the dollar.
The key points of interest were that the Fed will continue to monitor dollar developments closely and "...will help ensure that the dollar is strong and a source of global financial stability."
While some might view the dollar remarks as typically sterile, the market took brief notice that the Fed Chairman chose this occasion to provide this color. The knee-jerk response led to a spike in the dollar index, but it wasn't long before the dollar index moved back to its lows for the day.
Reading between the lines, it would appear that the market thinks the remark was more compulsory than anything else and basically innocuous. Mr. Bernanke helped feed that interpretation when he reiterated in the next paragraph of his speech that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
Truth be told, the most salient observation for the market that was made by the Fed Chairman came in the Q&A session.
In response to a question that was basically a way to determine if the Fed thinks we are seeing another asset bubble developing, Chairman Bernanke acknowledged that it is extraordinarily difficult to assess asset prices but that it wasn't obvious to him that there are "misalignments" in the U.S. financial system.
Strikingly, the dollar index extended its losses in the wake of that remark while stocks, bonds and commodities moved to their highs for the day.
The Fed Chairman, to be fair, did not say buy stocks, bonds, and commodities, yet the lack of a warning on the valuation of assets was more than enough for traders.
In an update to our Market View that was published recently, we said we held a bullish short-term view that was predicated on a number of factors that included easy economic and earnings comparisons and anxious money mangers fighting to catch up to performance benchmarks.
The lack of a warning on asset prices, when the Fed Chairman had a chance to give one, can be added to the list.
--Patrick J. O'Hare, Briefing.com
| Fed Economic Projections (central tendencies as of June 2009) | |||
|---|---|---|---|
| 2009 | 2010 | 2011 | |
| Change in real GDP | -1.5 to -1.0 | 2.1 to 3.3 | 3.8 to 4.6 |
| April projection | -2.0 to -1.3 | 2.0 to 3.0 | 3.5 to 4.8 |
| Unemployment rate | 9.8 to 10.1 | 9.5 to 9.8 | 8.4 to 8.8 |
| April projection | 9.2 to 9.6 | 9.0 to 9.5 | 7.7 to 8.5 |
| PCE inflation | 1.0 to 1.4 | 1.2 to 1.8 | 1.1 to 2.0 |
| April projection | 0.6 to 0.9 | 1.0 to 1.6 | 1.0 to 1.9 |
| Core PCE inflation | 1.3 to 1.6 | 1.0 to 1.5 | 0.9 to 1.7 |
| April projection | 1.0 to 1.5 | 0.7 to 1.3 | 0.8 to 1.6 |
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