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US: FedWatch

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Bernanke's speech on the economic outlook

Wed, Jun 4 2008, 08:28 GMT
by BBVA Bancomer Team

BBVA Bancomer

Bernanke signaled the Fed intention to end interest rates easing.

“For now, policy seems well positioned to promote moderate growth and price stability over time. We will, of course, be watching the evolving situation closely and are prepared to act as needed to meet our dual mandate”.

Bernanke remains alert, but feels more confident that financial instability is receding.

“The resulting reductions in funding pressures, together with the increased confidence created by the assurance that backstop liquidity is available to eligible institutions, should help to promote an orderly resolution of current market dislocations”.

Expressing more confidence on the resolution of financial crisis, Bernanke highlighted potential inflationary pressures arising from commodity appreciation and dollar weakness.

“The possibility that commodity prices will continue to rise is an important risk to the inflation forecast…we continue to carefully monitor developments in foreign exchange markets. The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer prices inflation”.

Long-term policy actions will focus on perfecting the current regulatory framework.

“We have worked with lenders and servicers to encourage appropriate modifications of distressed mortgage loans, and we have proposed new rules to improve disclosure and to ban unfair or deceptive acts and practices in mortgage lending”.

Bottom Line. Fed seems increasingly worry on inflationary risks and less pessimistic on the growth front. Recent economic indicators have backed up Fed’s scenario, which includes further weakness in 2Q08 and recovery starting in 2H08. Banks’ ability to raise capital, together with measures aimed at providing liquidity to the markets, have eased significant strains. However, the risk of a fall back persists: home prices continue to decline and equilibrium in credit markets has not been restored completely. Thus, we don’t expect the Fed to increase rates soon.

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Published on  Wed, Jun 4 2008, 08:39 GMT