Mr. Market Missed Something In Bernanke's Speech

by: Todd Sullivan

People have grasped onto Bernanke's last sentence in Thursday's speech. They seem to have missed what he said before and may wish they didn't.

It seems the only thing the market heard was the following sentence.
Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.

What they seemed to have missed was this little nugget in the prior paragraph:
Even as the outlook for real activity has weakened, there have been some important developments on the inflation front. Most notably, the same increase in oil prices that may be a negative influence on growth is also lifting overall consumer prices and probably putting some upward pressure on core inflation measures as well. Last year, food prices also increased exceptionally rapidly by recent standards, further boosting overall consumer price inflation. Thus far, inflation expectations appear to have remained reasonably well anchored, and pressures on resource utilization have diminished a bit. However, any tendency of inflation expectations to become unmoored or for the Fed’s inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank’s policy flexibility to counter shortfalls in growth in the future. Accordingly, in the months ahead we will be closely monitoring the inflation situation, particularly as regards to inflation expectations.
While an upcoming rate cut seems to be a forgone conclusion, it would seem Bernanke is trying to tell the market not to get too far ahead of itself down the road. Fed funds futures seem to be pricing a full percentage point cut or more in rates this year. What Bernanke is telling the market is that while it will get its cut this month and it will most likely be a 50 point one, inflation will determine the ability of future cuts to be made...