US Federal Reserve Chairman Ben Bernanke heads to Congress to speak to the House Financial Services Committee on Wednesday morning US time, and then to the Senate Banking Committee 24 hours later.
This will be Bernanke’s 16th so-called Humphrey Hawkins testimony.
The world will be listening very carefully for any new clues regarding the direction of monetary policy. The Australian and Asian markets are quiet as traders wait to see what he has to say – anything from his lips could potentially rock the markets around the world.
In particular, everyone will want to know 1) when the Fed could begin to taper its monthly purchases of $85 billion dollars worth of bonds and 2) when it plans to start hiking its benchmark interest rate, which is currently near 0%.
In Australian terms a more distant taper horizon is likely to lead to a slower decline in the Aussie dollar against the USD.
Here’s what the experts are saying (emphasis added):
Neal Soss, Credit Suisse:
“Bernanke probably will not dissuade the markets of the notion that a tapering is likely as soon as September. But his comments may sound dovish as he reiterates that any change in the size of asset purchases is dependent on the economic data and on financial market conditions.
The run-up in yields in recent weeks, for example, practically demands that Bernanke comment specifically on the risks posed by tighter financial market conditions. He may also focus on the risk of lower-than-desired inflation…
…We assume this will be Bernanke’s final semiannual testimony. Will he reveal his intentions regarding a third term? Possible, but not probable.“
Deutsche Bank’s Joe LaVorgna:
The Chairman technically will be speaking on behalf of the FOMC so his commentary may not be as overtly dovish as his recent remarks at the NBER conference; he will likely reiterate the Fed’s desire to begin tapering asset purchases sometime this year and highlight the progress made in the labour market since the Fed embarked on QE3 last September. If any new ground is broken, we may get a better sense of when the committee expects asset purchases to end, which may be sooner than investors currently anticipate since we learned in the latest minutes that half of FOMC participants saw purchases concluding by year end. Most importantly, pay attention to the Q&A session because this is where Bernanke has tended to provide the most market pertinent information.
TD Securities’ Millan Mulraine:
In today’s testimony we expect to see more of “good Ben”, and his remarks should again emphasise the data- dependency of any tapering action. He is also likely to shy away from any mention of “September” as other Fed officials have indicated, though he will continue to reference the “later this year” theme – as he has in the past. More importantly, even when referring to tapering, Bernanke is likely to emphasise the dovish forward guidance to good effect, dwelling on the reference to the reduction in purchases taking place in “measured steps”.
In the context of his appearance before lawmakers, one key consideration for the market will be whether Bernanke continues to emphasise the drag from fiscal austerity. In particular, it would be interesting to see whether the recent disappointment on the data front causes any discernible shifts in the Fed’s assessment on the impact of fiscal policy tightening on the real economy or a reassessment on the relatively optimistic economic outlook presented at last month’s FOMC meeting. However, on the labour market and inflation front, the Chairman is likely to stick to the recent script of “the downside risks to the outlook for the economy and the labour market have diminished since the fall” and “the Committee expects inflation to move back towards this 2 per cent longer-term objective over time.”
High Frequency Economics’ Jim O’Sullivan:
The Fed chairman will probably be less market-moving today than he was on May 22, June 19 and July 10. However, if anything, we suspect he will be the “good cop” from July 10 more than the “bad cop” from May 22 and June 19.
Note that Mr. Bernanke’s prepared text and the Monetary Policy Report will be released at 8:30 EDT—before the formal testimony at 10:00 EDT. That change was announced earlier this week.
By now, the chairman’s message is fairly clear: Yes, we plan on scaling down the asset purchase program soon, but, no, we will not be shrinking the balance sheet or raising policy rates for some time. Policy needs to and will remain highly accommodative for a while. And remember, the 6.5% unemployment rate marker is a threshold for possible tightening, not a trigger.
…I suspect that Mr. Bernanke will try very hard this week not to rock the boat – particularly given that global growth is slowing and, based on available partial data, U.S. GDP expansion is tracking only around 1.2% for the second quarter.
Look for Mr. Bernanke to try to strike a delicate balance: reassuring us that the Fed remains committed to supporting the economy, but also seeking to avoid encouraging additional artificial asset pricing that would further disconnect markets from underlying fundamentals.
It is indeed a high wire act for the Chairman – and with an important qualification.
Unlike the usual setup, Mr. Bernanke is not interested in creating lots of excitement. Let us hope that he has the agility to deliver the delicate balance, along with cooperating cross winds.
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