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When in doubt, wait for the next set of data. Federal Reserve chairman Ben Bernanke will face an uphill struggle if he wants to establish a hawkish reputation. Attributing the inverted yield curve to lower term premiums that would reflect stable long-term investors' expectations and helped further by the global savings glut, Bernanke turned conventional wisdom upside-down in a speech on Monday evening.

He is confident that the $25 trillion market for dollar bonds is so large that it "should be able to absorb purchases and sales of large absolute magnitude with relatively modest changes in yields." Historically low long-term yields may influence the Fed's decision process towards more accommodation, Bernanke indicated. "To be consistent with a lower long-term real rate, the short-term policy rate might have to be lower than it would otherwise be as well."

Bernanke's outlook on future monetary policy was less confident. He said policymakers would have too monitor multiple signals from financial variables:

Ultimately, a robust approach to policymaking requires the use of multiple sources of information and multiple methods of analysis, combined with frequent reality checks. By not tying policy to a small set of forecast indicators, we may sacrifice some degree of simplicity, but we are less likely to be misled when a favored variable behaves in an unusual manner.

Source: Bernanke Likely To Err On Easy Money Side