Wednesday, June 6, 2007

Bernanke Says Nothing New: Market Thinks He Did?

"On average over the coming quarters we expect the economy to advance at a moderate pace close to or slightly below the economies trend rate of expansion" Ben Bernanke 6/5/2007. On this speech the market sold off .5% today or about 80 points on the Dow and 8 points on the S&P. I guess I am confused because, how is this anything different than anything he has been saying for the last 6 moths?

Regarding housing he added "We have not seen major spillovers from housing onto other sectors of the economy," he observed.

As for inflation, he said that underlying inflation, which excludes food and energy prices, still remains "somewhat elevated" despite some improvements. Bernanke again clung to the Fed's forecast that underlying inflation seems likely to moderate gradually over time. Again, has he ever said anything different? If anything, this inflation talk has seemed to moderate fro earlier statements.

In February in testimony to congress he said "In the five policy meetings since the July report, the Federal Open Market Committee (FOMC) has maintained the federal funds rate at 5-1/4 percent. So far, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing of core inflation. However, in the statement accompanying last month's policy decision, the FOMC again indicated that its predominant policy concern is the risk that inflation will fail to ease as expected and that it is prepared to take action to address inflation risks if developments warrant".

Later in the testimony he said "Overall, the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes. Such an outlook is reflected in the projections that the members of the Board of Governors and presidents of the Federal Reserve Banks made around the time of the FOMC meeting late last month. The central tendency of those forecasts--which are based on the information available at that time and on the assumption of appropriate monetary policy--is for real GDP to increase about 2-1/2 to 3 percent in 2007..."

So, what is the problem? Why are we so caught up in potential rate cuts when the guy has never even alluded to one? If anything, we should be relived he is not raising them to crush inflation. Also, when did 5.25% become a high rate?

If he drops rates that's bad because that means growth is slowing or unemployment is on the rise. The status quo right now is working just fine, no need to tweak things just to tweak them.

Regarding the state of US business he said "The business sector remains in excellent financial condition, with strong growth in profits, liquid balance sheets, and corporate leverage near historical lows. Last year, those factors helped to support continued advances in business capital expenditures."

Still trying to find the problem here. This market is a bit masochistic as it takes good news and punishes itself... odd.


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