Fed Watch: Bernanke Testimony Focuses on Growth, FOMC Minutes Released
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Current Rate: 2.00%
Next Rate Decision: Aug. 5
Market Expectations: The OIS implied rate suggests markets are 16% priced in for a 25bp hike at the next meeting and are pricing in a 41% chance of a quarter-point hike at the September meeting.
Last week was a fairly busy week for Federal Reserve news, with two days of testimony from Chairman Ben Bernanke before the Senate Banking Committee on Tuesday and the House of Representatives' Committee on Financial Services on Wednesday. Also on Wednesday, the Federal Open Market Committee released the minutes from its June 24-25 monetary policy meeting.
Appearing before the Senate Banking Committee on Tuesday at the semi-annual Humphrey-Hawkins testimony, Fed Chairman Bernanke said he sees significant downside risks to the growth outlook as many firms are under considerable stress. The Fed Chairman added that judging the balance of risks is challenging and that he sees a limited pass-through of oil to consumer prices. In the Q&A portion of his testimony, Bernanke said that banks are being challenged by the current credit conditions and that he believes investment banks require supervision.
Bernanke continued to keep the focus on growth in his second day of testimony on Wednesday, and did not deviate from in his prepared remarks from comments delivered the day before. In the Q&A that followed, Bernanke repeated many of the comments made on Tuesday to the Senate Banking Committee, continuing to highlight the importance of strengthening the financial system and resolving the housing crisis in the United States so as to bolster economic growth in the region.
The recent financial crisis has revealed weakness in the U.S. economy, Bernanke said, echoing his opening remarks. Emphasis should be put on strengthening the financial system, he added, calling for better oversight of financial institutions and the creation of a regulator for GSEs (Government Sponsored Enterprises).
Bernanke also reminded members of Congress that inflation remains a top priority for the Fed and that it is "currently too high." Bernanke added that the Fed was balancing the risks to the economy and promised to be responsive as the situation evolves.
Minutes from the FOMC's June 24-25 monetary policy meeting released last week revealed that FOMC board members agreed upside risks to inflation had increased and generally agreed downside risks to growth had diminished. It also showed most members thought the current 2.00% target rate was appropriate but that risks to inflation may initiate a reassessment.
Most members said an unchanged target rate "would support an eventual decline in both inflation and unemployment," but that "circumstances could change quickly" and they would be ready to "respond promptly to incoming information about the evolution of risks."
The Committee expects inflation to "moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization". On growth, the FOMC staff raised its projection for GDP growth in 2008. Participants' projections for real GDP growth were between 1.0% and 1.6%, noticeably higher than the April projections, which were between 0.3% and 1.2%.
Rudy Narvas, economist at 4Cast, said the minutes were "exactly what we were expecting" for one exception, namely that it appears other members besides Richard Fisher were interested in hiking rates. "It looks like Ben Bernanke himself was leaning towards rate hikes sooner rather than later," Narvas added.
Recent Fed speakers included Minneapolis Federal Reserve President Gary Stern (voter), who on Friday said that the Federal Reserve can't wait for the end of the crisis to raise rates. "I worry about the prospects for inflation. The headline inflation rate is clearly too high," Stern said in an interview with Bloomberg. He also noted that the Fed is well positioned for a downside risk to growth. He commented that the current credit crisis was reminiscent of the early 1990s.
Kansas City Fed President Thomas Hoenig said on Wednesday that he expects positive but subdued growth for the remainder of 2008 and that the U.S. should avoid a recession. Speaking in Colorado, Hoenig said the strength in exports and government spending, tax rebates and a reduced drag from housing should help counter the effects of higher energy prices and financial stress.
Delivering comments at the FDIC's Minority Depository Institutions National Conference in Chicago last week, Fed Governor Randall Kroszner said the Fed's new rules on mortgages would alleviate pressures in nearly the entire subprime sector and some other alternative mortgage markets. "At the core of our program, we have implemented a series of web-based modules designed to assist banks in addressing three distinctive development stages: (1) starting a bank, (2) managing its transition from a start-up to an established bank, and (3) building shareholder value once a bank has been established on a sound footing," Kroszner said.
San Francisco Fed President Janet Yellen sounded the inflation alarm on July 17, saying inflation is a "concern" and that headline inflation is currently "much higher than I would like." Speaking in Portland, Oregon, Yellen reiterated comments made in a July 7 speech, saying she expects growth to pick up in 2009. She also said inflation is likely to moderate by early next year.
Answering questions from the audience following her speech, Yellen said consumer confidence has "cratered" and that there has been some softening in the U.S. commercial real estate market. In her initial speech on July 7, Yellen said market conditions "could get worse before they get better", but that she expects market functioning to "improve markedly" by 2009.
"On balance, I still see inflation expectations as reasonably well anchored and I anticipate that consumer survey measures will come down once oil and food prices stop rising," she said. "But the risks to inflation are likely not symmetric and they have definitely increased. We cannot and will not allow a wage-price spiral to develop."
On July 16, Kansas Fed President Thomas Hoenig said in an interview with Reuters that an accommodative monetary policy can embed inflation into the economy. Hoenig said that monetary policy has the potential to make temporary price hikes and turn them into long-lasting inflation. Hoenig added that it will take years for the U.S. economy and the financial market to recover from the housing crisis.
Focusing on growth, Richmond Fed President Jeffrey Lacker (non-voter) said on July 15 that the Federal Reserve may need to raise rates amid weak economic growth, which he doesn't expect to pick up again until later next year. As growth risks fade, withdrawing fiscal stimulus makes "eminent sense," he added. During his speech, Lacker said the inflation outlook has "deteriorated", but that the Fed should still remain vigilant and try to limit a rise in inflation expectations.
Also that week, the Securities and Exchange Commission and the Federal Reserve agreed on an information-sharing pact, which aims to better detect potential risks to the financial system. The agreement stipulates that the SEC and the Fed will co-operate on issues of common interest such as anti-laundering efforts, bank brokerage activities, and clearing and settling financial transactions conducted by investment firms or banks.
By Stephen Huebl and edited by Nancy Girgis
©CEP News Ltd. 2008
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