Why Did the Market Act Like Bernanke Said Something New?

"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 on 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 different from anything he has been saying for the last six moths?

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

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 from earlier statements.

In February in a 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 it 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.

Comments

[Michael Hughes:]

Perhaps, Bernanke is anticipating the effect that proposed immigration reform will have on inflation. Unlike our president and congress, he may be anticipating the additional wage, benefit, and tax consequentces of legally employing more than 12 million people. We might also see legal costs rise since companies currently hiring employees under the table may now have to justify in court the hiring of foreign labor over US citizens.

2007 Jun 06 12:45 PM

[FourBrane:]

The headline writers ascribe selloffs variously to worries about inflation, interest, etc. The journalists (whose portfolios--if they even have them--probably mostly have four digit balances) have to come up with something to say. They can't just write, "The market dropped. We don't know why."
In this case, I think the market had run up too far, too fast, and everyone knows that the market will sell off in June and July as people leave for vacations. We were all crowded out on the shaky branch with lots of fast profits and all us monkeys decided to jump at the same time.

As for the silliness about immigration, ...what can one say to a stupid theory like that? There are twelve million reasons that's the dumbest thing I've heard.

2007 Jun 07 02:44 AM

[emily x:]

Amen! My theory is b/c he made the speech so early, it seemed extra important. When I saw him on TV first thing in the morning, with a "breaking news" banner, I just went "Uh-oh -- what now? This can't be good..." And even tho he wasn't *saying* anything distressing, by then I was convinced it was bad news!

I think in the future, Mr. Bernanke should present his comments from a beach chair, under a palm tree, with a cool drink in his hand and the waves gently cascading behind him. That would be the "good news" or "no bad news" scenario. If it is bad news, then he should deliver the speech from a plunging rollercoaster, or maybe having jumped out of a plane, just before he pulls the parachute (or if it's *really* bad - no parachute!). That way there would be no mistaking what he's trying to "signal."

2007 Jun 07 10:25 AM

[Todd Sullivan:]

I WOULD LIKE TO SEE THEM JUST RUN THE SAME CLIP OVER AND OVER AND SAVE THE MEDIA THE EFFORT OF TRYING TO FIGURE HIM OUT..

THERE IS NOTHING TO FIGURE

2007 Jun 07 12:29 PM

[wixeywaxy:]

You article is correct, the Fed has been following rather consistently it's policy indicated earlier and with less mealy mouth conversation than under the Greenspan area. Interest rates are low, yet not too low. The result is a reasonable balance which is fair to the entity making loans as well as the borrower. There is obviously no reluctance to fund huge deals presently. Vic

2007 Jun 07 04:41 PM