Watch live the first of two official monetary policy testimonies by Ben Bernanke, today being before Congress, and thus Ron Paul, tomorrow before the Senate. Among the critical items to be discussed are the role of fiscal policy, whether there will be QE3, and how (and when) the Fed will proceed with future rate hikes. Mostly, it is expected be a whole lot of hot air. Full text of the report can be read here. The reason everything is surging is because, as predicted, the Chairsatan appears to have just ushered in QE3: "The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support. The Federal Reserve remains prepared to respond should economic developments indicate that an adjustment of monetary policy would be appropriate."
Key speech highlights:
- Fed's Bernanke says economy could evolve in a way that would warrant move to less accommodative policy
- Fed's Bernanke says given uncertainties about recovery and inflation, Fed remains prepared to adjust stance of policy if appropriate
- Fed's Bernanke says possibility remains that weakness more persistent than expected, deflation risks may return implying need.
- Fed's Bernanke says most recent data attest to continuing weakness of labour market, unemployment rate to decline only gradually
- Fed's Bernanke says recent weaker-than-expected economic performance appears to be the result of temporary factors
- Fed says debt ceiling debate hasn't affected Treasury prices yet
- Fed's Bernanke says inflation has picked up so far this year, but more of recent rise appears likely to be transitory
For those curious, Citi's Steven Englaprovides a backdrop for how FX (which is where the vol and the leverage is, and thus is far more important than stocks) may interpret the testimony:
The Bernanke testimony baseline:
- Growth is sluggish, for reasons that can not be attributer to special factors -- that was the FX market takeaway from yesterday's Minutes
- QE3 not on the radar screen now
- Hikes not on the radar screen now
As we saw yesterday, small and possibly unintended deviations, from expectations of Fed policy can have visible currency effects.
We note in particular that our economists expect Bernanke to indicate a 'somewhat stronger' H2 outlook and unusual uncertainty. Yesterday FX investors saw persistent bearishness on the growth outlook in the Minutes. If Bernanke emphasizes that the Fed still sees growth as bouncing back, even tentatively, some of this pessimism may be unwound. Given that the market does not price fed funds at 50bps until the beginning of 2013, even modest optimism or hawkishness on inflation could trigger some backing up of rates and by implication currency knock-on effect.
The USD downside is if the Fed Chairman 'buys into' the weak payroll data and opens the door to QE3, as the best stimulus option out of a set of bad choices. Given the history of QE2, the initial reaction would be equities positive and USD negative. If he were to open up this door, the major beneficiaries by far would be commodity currencies, AUD, CAD, NOK, and related EM currencies (with possible spillovers into commodity prices themselves).. Given the QE2 experience investors will anticipate more of an impact of nominal asset prices than on real GDP, so the more sensitive the asset is to liquidity, the better it is likely to do.