Bernanke Calms Investors

Speaking before the Senate yesterday Fed Chairman Ben Bernanke relieved recent investor fears of higher interest rates by reiterating his relaxed outlook of apparently slowing inflation and sustainable economic growth. He said the risk that inflation will not moderate is the Fed's primary concern, and it will take action to stem inflation should developments warrant. The labor market is a key area of concern: a low unemployment rate and difficulty finding qualified workers have resulted in accelerating compensation, but he said increasing productivity and narrowing profit margins could help offset labor costs. He was upbeat about ongoing economic growth, and sees tentative signs of stabilization in the housing sector. He called recent pressures in the subprime mortgage market a "significant concern" but said they wouldn't harm the overall economy. The Fed cut its forecast real 2007 GDP growth from 3% to 2.5%, and forecast 2% core inflation and 4.5% unemployment. Bernanke said the inverted yield curve does not necessarily predict a slowing economy, and that other measures such as corporate bond spreads suggest anything but. On China's currency, he said "they have moved in the right direction but... I don't think they've done enough." On Japan, he said he sees no evidence of currency manipulation. Stock and Treasury markets rallied in reaction to the speech, and the dollar fell to a six week low vs. the euro.

Sources: Text of Speech, Wall Street Journal, MarketWatch, Reuters
Commentary: Economists React [WSJ] • Return of Goldilocks: What About the Greenback? • Big Ben’s Stock Market Valentine
Stocks/ETFs to watch: S&P 500 Index (SPY), Diamonds Trust Series 1 ETF (DIA), iShares Lehman Aggregate Bond (AGG)

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