Bernanke: Bearish as Ever, But Don’t Expect Too Much

February 14, 2008

Federal Reserve Chairman Ben Bernanke delivered a speech to Congress today and he was bearish as ever. Not only did the Fed lower their growth forecasts, but Bernanke also indicated that the weakness of the labor market will hurt consumer spending going forward. At various points in his prepared speech, he emphasized concern about downside risks. Despite a rise in food and energy prices, they believe that prices will remain well anchored for the timing being. Bernanke’s comments triggered a fresh round of dollar weakness.

But be careful of expecting too many rate cuts because Bernanke pointed out that monetary policy works with a lag which suggests that he wants to give the economy time to absorb the recent rate cuts.

Key Points from Bernanke’s Speech:

“A critical task for the Federal Reserve over the course of this year will be to assess whether the stance of monetary policy is properly calibrated to foster our mandated objectives of maximum employment and price stability and, in particular, whether the policy actions taken thus far are having their intended effects. Monetary policy works with a lag. Therefore, our policy stance must be determined in light of the medium-term forecast for real activity and inflation, as well as the risks to that forecast. At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt. At the same time, overall consumer price inflation should moderate from its recent rates, and the public’s longer-term inflation expectations should remain reasonably well anchored.

“Although the baseline outlook envisions an improving picture, it is important to recognize that downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or that credit conditions may tighten substantially further. The FOMC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth
and to provide adequate insurance against downside risks.”

Posted in Bernanke, Fed Rate Cut, Fed Rate Cut Expectations, Federal Reserve