FOMC: No New Signals from Bernanke

Overview:

The testimony by Bernanke provided little new information relative to recent speeches and the minutes from the January meeting. The FOMC is currently sticking to its script, keeping the primary focus on the downside risks to growth. While the Chairman provided some lip-service to inflation, the speech leaves the impression that further policy easing is highly likely.

Details:

Bernanke's comments on the economic outlook and the risk assessment were very similar to the message from the minutes (Flash Comment - FOMC: Downside risks and great uncertainty, 21 February). Below are some selected passages from the speech. The entire testimony is available here.

Growth:

- The housing market is expected to continue to weigh on economic activity in coming quarters.
- Consumer spending ... appears to have slowed significantly toward the end of the year... Slowing job creation is yet another potential drag on household spending... However, the recently enacted fiscal stimulus package should provide some support for household spending during the second half of this year and into next year.
- Non-residential construction is likely to decelerate sharply in coming quarters as business activity slows and funding becomes harder to obtain.
- The incoming information since our January meeting continues to suggest sluggish economic activity in the near term.
- The risks to this outlook remain to the downside. The risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.
- The risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.

Inflation:

- Inflation could be lower than we anticipate if slower-than-expected global growth moderates the pressure on the prices of energy and other commodities or if rates of domestic resource utilization fall more than we currently expect.
- Upside risks to the inflation projection are also present, however, including the possibilities that energy and food prices do not flatten out or that the pass-through to core prices from higher commodity prices and from the weaker dollar may be greater than we anticipate.
- ... the Federal Reserve will continue to monitor closely inflation and inflation expectations.
- Any tendency of inflation expectations to become unmoored or for the Fed's inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and could reduce the flexibility of the FOMC to counter shortfalls in growth in the future.

Policy outlook:

- Although the FOMC participants' economic projections envision an improving economic picture, it is important to recognize that downside risks to growth remain. The FOMC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.

Assessment & Outlook:

In the markets, the speech did not lead to any major reassessment of the expected path for monetary policy. Further, the speech does not affect our view that the Fed funds rate is heading for 2.0% by the June meeting. We continue to expect a 50bp easing in March, followed by 25bp at the April and June meetings.

Danske Bank

Posted in: Forex