Humphrey-Hawkins Testimony: Play it Again, Ben

February 24, 2010

Formerly know as the semi-annual Humphrey-Hawkins hearings, the message today from Fed Chairman Bernanke to the House Banking Committee was little different from what he conveyed last time around on July 21.  He drew a distinction between better market functionality, which is allowing the gradual reversal of unconventional liquidity provisions made to unfreeze a market seisure, and the tightening of monetary policy, which is still not yet appropriate.   An exceptionally low federal funds rate should be possible for an additional extended period.  Conditions for tightening that were stated last July still appear relevant, namely 1) improved labor market conditions, 2) convincing evidence that the economy is in recovery and not merely a stabilization phase between recession and recovery, and 3) signs that pressures suppressing inflation are diminishing.

Today’s economic backdrop was conducive to selling the dovish message that recovery remains tentative despite strong GDP growth last quarter.  New home sales in America fell 11.2% in January, their third straight drop.  From last year’s peak of 419K hit in July, new home sales have plunged 26.3% to a record low of 309K, and sales in the Northeast collapsed 35% in January alone.  Conventional wisdom in the early days of the recession and before the mishandled bankruptcy of Lehman Brothers stipulated that the “fat lady” in this slump would be an upturn in housing.  We’re still waiting for this fat lady to sing.

As of 12:30 in the eastern United States, markets had reacted similarly to Bernanke as they had the last time.  Back on July 21, the dollar was up 0.1% against the euro but down 0.5% versus the yen. Ten-year Treasury yields fell sharply that day, and the Dow closed 0.8% higher.  The Dow again shows a net rise of 0.8%, 10-year yields today are off two basis points, and the dollar shows mild declines so far of 0.4% against the euro and 0.2% relative to the yen.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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