The following is a daily market commentary by Scott J. Brown, chief economist and senior vice president of equity research at Raymond James & Associates Inc.
Wednesday: Fed Chairman Bernanke's monetary policy testimony contained little new information. However, the markets were a bit relieved that he didn't signal higher rates.
Bernanke began by noting that “highly stimulative” monetary and fiscal policies, along with efforts to stabilize the financial system,“ helped arrest the decline and are supporting a nascent economic recovery.” Progress in the working down of unwanted inventories contributed to about a 4% annual rate of GDP growth in the second half of 2009.
However, “as the impetus provided by the inventory cycle is temporary, and as the fiscal support for economic growth likely will diminish later this year, a sustained recovery will depend on continued growth in private sector final demand for goods and services.” The Fed still expects moderate GDP growth this year and next, but the wording of Bernanke's outlook does not suggest that policymakers will raise short-term interest rates anytime soon.
Bernanke repeated that “the FOMC continues to anticipate that economic conditions – including low rates of resource utilization, subdued inflation trends, and stable inflation expectations – are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
Still, “as the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures.”
Last week's increase in the discount rate (to 0.75%) “like the closure of most of the special lending facilities earlier this month, are in response to the improved functioning of financial markets, which has reduced the need for extraordinary assistance from the Federal Reserve.” These adjustments “are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy, which remains about the same as it was at the time of the January meeting of the FOMC.”
The Fed has a number of tools to promote economic recovery and preserve price stability, including raising the interest rate it pays on reserves and expanding its operational capacity for conducting reverse repurchase agreements. Bernanke also welcomed increased transparency at the Fed and indicated support for financial regulatory system reform.
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New home sales fell further in January (in contrast to expectations of a moderate rebound), hitting a record low. Sales have fallen 22.8% in the last three months. Seasonal adjustment is difficult in January, often exaggerating what would otherwise be minor moves in the headline figure.
However, the report continued a recent theme of worse-than expected economic data (but the market didn't care).
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Today: Bernanke will repeat his written testimony to the Senate Banking Committee. There will be new Q&A, but don't expect any major new revelations. The economic data have some market-moving potential.
Seasonal and holiday adjustments add noise to the weekly jobless claims figure. Durable goods orders are expected to trend higher, but monthly changes are notoriously volatile.
For more economic commentaries by Dr. Brown, go to
rjcapitalmarkets.com/eco_commentary_240_main.asp.
