Bernanke Testimony: Dove With Gloves Off

The testimony of Federal Reserve Chairman Bernanke this morning chronicles the very difficult and very fluid situation which confronts policymakers. Policy makers confront an economy bedeviled by tight credit, falling home prices ,a soft labor market and an unenthusiastic business sector. The headwinds are strong indeed and Bernanke noted that the risks are skewed to the downside and that he expected growth to be appreciably below trend the remainder of this year. He also suggested that the recovery in the following two years would be gradual. However, the Committee remains vigilant regarding a resurgence of inflation and they are particularly concerned that the inflationary expectations might become embedded in the domestic wage price structure.

Bernanke did spend quite a bit of time discussing the price of oil and the supply demand factors which have caused the price to surge. He laid much of the “blame” at the feet of emerging market economies and the demand from those countries as they establish modern industrial states.

On the supply side he noted inadequate investment as a reason that supply lags and he noted that geopolitical risks have constricted supply.

He also took a swipe at the head-in-the-sand crowd who suspect that speculators are responsible for the surge in prices. He said that a little more information and transparency was a good thing but he thought that it would not significantly move the price of the underlying commodity.

On balance I think that the speech is on the dovish side. He made the case that the economy would be sluggish, in effect, for several years. On the inflation side he noted that that a secondary effect of higher oil prices has yet to emerge. He also noted that we have not seen the requisite rise in inflationary expectations which might force some action from the Federal Reserve.

In that regard, it is hard to imagine what action which they might take in light of the very fragile condition of the economy. Any action which restrains the growth of credit currently would be an act of financial immolation.

Comments

[morgan77:]

Nice piece- You're right on at the end about what steps the Fed can take in a such a fragile economy. I read a piece this morning in which the author hopes for another rate CUT. It won't happen but it's fundamentally interesting.
here's the article:
www.greenfaucet.com/th...

Also a discussion about the VIX, the dollar, PPI, and retail sales.

2008 Jul 15 12:00 PM

[suntzu187:]

Talk about head-in-the-sand crowd. Jansen and Bernanke epitomize that cliche: still in denial that speculation is behind the obscene price of oil. Obviously, the disintegration of the dollar's value also has a major impact, but not nearly as much. To argue that there is a supply problem is simply asinine, as the link below proves.

2008 Jul 15 12:28 PM

[hw2h:]

I think the market is really getting too nervous, a sigh of fear... it also suggests that we are close to bottom, as I said on my site, it is close the the beginning of the end

2008 Jul 15 12:30 PM

[suntzu187:]

www.counterpunch.org/z...

2008 Jul 15 12:30 PM

[The Geared ...:]

Nice article John,

I'm extremely pleased with the way Bernanke just put it on the table without sweeping the elephant under the rug. Let the people know what the economy could be like for the next few years. People who are not diehard into the markets may understand this and shift their 401k to more conservative approaches. Readers like you and I will see this as a time to look into emerging markets and start stockpiling while the market is buyer friendly.

Great comment about the oil prices only being mildly effected by speculators. Their called traders too, and they should not be persecuted. Just because I trade forex, does that make me responsible for the week dollar. My point exactly.

Cheers

2008 Jul 15 01:56 PM

[gabe borens...:]

The falling home prices are reflective of the real problem,namely deflation.Since the Great Depression,every inflationary cycle was responsible for the uptrend in the housing prices.
There is no evidence that the commodity price spike is a function of the demand pull inflation.
It is all the cost push -there are no visible commodity shortages .As the global economies are decelerating that process will create a massive economic implosion outside of U.S.driving most commodity prices down.
In the meantime the FED should be easing -helping Americans and making the J curve more effective to the point were the American exports have no competition.
The housing problems of today can be ascribed to financial institutions (lending policies),the FED ,for raising FF aggressively untill the mid 2007,and the rating agencies for not understanding the real risks.
Now ,all of the issues are in the open and are being addressed by the FED and the relevant segment of the corporate America.
The distortion of the facts and the investment hysteria are likely a reflection of the market bottom.
In June of 2005 I have warned of the current events (and have stated that the events may be beyond the FED's control) in an interview with Mark Gilbert (Bloomberg- London).The warning was not taken seriously .On September 18 ,2007 I have repeated the risks(Bloomberg TV-Brian Sullivan),and that was ignored for few weeks.
Now as the issues are clear and are addressed effectively,the investors are being paralyzed by the warning of impending debacle.
We are in the consolidating but volatile process.
The record economic rebound in U.S will be function of the mega economic implosion outside of the U.S (causing flight to the U.S ,dollar denominated assets).
Fantastic?,so was my previous analysis at the time ,but it became reality.
Investors must comprehend that the record open short interest is creating the unjustifiable pessimism.At 14,000 (Dow) everone was bullish ,below 11,00 everone is bearish.
A good sign for the bulls.
Mr.Bernanke may be intentionally cautious and pessimistic .
This market/economic paranoia would have been helpfull year ago.
A major rebound ahead
If there is a real crude shortage should not the industry focus on the Canadian oilsands?

2008 Jul 15 02:16 PM

[Skjellifetti:]

The Left constantly criticizes the Bushies/Right wing (for good reason!) for ignoring science and making policy choices that ignore evidence even when that evidence is overwhelming.

But the Left is just as guilty in their own way. There is no evidence that speculation has caused the price of oil to skyrocket while there is plenty of evidence that good ol' supply and demand are wrecking most of the havoc. One fact that ought to wake up the "its those evil speculators" crowd is that it is the Left wing economists like Paul Krugman who have been poking the most serious holes in their argument. But, hey, just exactly like the Right, the Left will ignore the evidence when it doesn't fit their carefully crafted internal reality.

2008 Jul 15 03:08 PM

[Jason Rines...:]

Gabe - great comments as per usual. Agree that Fed will raise rates marginally and ease some pain for the U.S. consumer. Also, imports will slow and our manufacturing and exports will pick up. Lastly, now hearing talk (finally) about investments in innovation and entrepenuars. To fuel the next giant Bull market economy in 4-5 years from now, both componants are equally important.

51% of our GDP was government and multinationals. Both will likely need to increase wages to cover the cost of living to retain skilled workers, although some overseas Asian and Indian management can be retained a bit more cost-effectively.

The other 49% which is largely small business and start-ups CAN'T raise wages or absorb much more in terms of inflation. But private investment is heading that way but I wouldn't want to ask an angel group or VC money just yet, probably Q2 2009 will be the best timing for a CEO to attempt to raise money for a start up or early stage company. We began moving towards a 'gods and clods' country and while some think this is just fine, most of us DONT.

2008 Jul 16 02:46 PM