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Goldman’s Jan Hatzius describes what Bernanke will tell Congress during his testimony today…We expect him to deliver a dovish message as far as the economy is concerned, at the margin more dovish than in the June 20 FOMC statement. After all, the economic indicators have clearly disappointed expectations since then. Our estimate for Q2 real GDP growth currently stands at 1.1% (annualized), down from 1.6% on June 19. Our Current Activity Indicator (CAI) stands at 1.0% for June, down from 1.5% for May as reported on June 19. (The June reading is now 1.7%, i.e. there has been a small upward revision since June 19.)
Moreover, the chairman is likely to indicate that further easing remains an option. The June 20 FOMC statement noted that “…[t]he Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labour market conditions in a context of price stability.” This is a clear “easing bias,” which has probably been reinforced by the weakness in the recent data. We would therefore expect the chairman to discuss the options for additional easing, at least in general terms. If he provides such a list, it would probably include, at a minimum, a further lengthening of the forward funds rate guidance and a return to asset purchases financed via an expansion of the balance sheet.
It might also include other options, such as a cut in the interest rate on excess reserves (IOER), a credit easing program along the lines of the “funding for lending” scheme recently announced by the Bank of England, and perhaps other “new tools” for easing financial conditions (as desired by “several” participants at the June 19-20 FOMC meeting).
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