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Chairman Bernanke's Testimony of July 15 – Both Forecast and Rhetoric Will be Important

Mon, Jul 14 2008, 23:27 GMT
by Asha Bangalore

Northern Trust

Chairman Bernanke’s Testimony of July 15 – Both Forecast and Rhetoric Will be Important

The FOMC statement of June 25 showed a subtle shift in emphasis to inflation from growth.

“Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.”

Incoming economic data and financial market turmoil suggest that this shift in emphasis needs to be revised. The jobless rate has risen from a low of 4.4% in the fourth quarter of 2006 to 5.3% in the second quarter of 2008. The residential sector remains mired in a recession. Consumer spending is soft and partly supported by tax rebates. The four economic variables the National Bureau Economic Research uses to date the onset and end of a recession have registered peaks. In other words, an unofficial recession is in place.

The Chairman’s remarks will need to focus on retaining credibility of the central bank. Close to the first anniversary of the current financial market turmoil, market participants are drawn back to August 7, 2007 when the Fed policy statement ran as follows:

“Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy. Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures. Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected.”

The Fed cannot afford another such serious error in judgment that was reversed in less than two weeks in August 2007. For this reason, both rhetoric and economic forecasts will be important.

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Published on  Mon, Jul 14 2008, 23:35 GMT