Insights from Q&A of Bernanke’s testimony

 EmailPrint This Post Print This Post

This post is a guest contribution by Asha Bangalore, vice president and economist of The Northern Trust  Company.

Chairman Bernanke’s testimony today was a repetition of the February 3, 2011 speech at the National Press Club.  He stressed that the unemployment rate was unacceptably high and inflation was low.  In Q&A session, Representative Ryan questioned Chairman Bernanke about whether the Fed is monetizing debt.  Bernanke explained that “debt monetization” stands for a permanent change in money supply to finance the debt.  He went on to add that the Fed plans to reverse course, thus it is not debt monetization.  Money supply grew 4.2% from a year ago during the week ended January 24 (see Chart 1), which is hardly indicative of impending inflationary pressures.

Another noteworthy question pertained to how the Fed would determine if QE3 will be necessary.  Bernanke noted that if the recovery is on a sustainable path and inflation is low and stable, it will not be necessary.  He was also asked under what circumstances the Fed would reverse QE2, which is currently underway.  Bernanke indicated that rapid economic growth and rising risk of inflation would be necessary to reverse the current plan to purchase $600 billion of Treasury securities by June 2011.

Bernanke reiterated that inflation in the U.S is “very very low” (Inflation measures are in Chart 2).  This comment was in response to Representative Ryan citing a Wall Street Journal story “Inflation Worries Spread,” published today.  The Chairman implied that inflation in emerging markets requires responses from their respective central bankers.  It is important to bear in mind that the dual speed world economy (slow growth in advanced economies vs. strong growth in emerging markets) will entail different monetary policy responses such that it is suitable to the economic status of each economy.

Bernanke’s opinion about the recent upward trend of bond yields was also sought.  The Chairman replied that it reflects “increasing optimism about the U.S. economy.”  The 2-year and 10-year Treasury note yields were trading at 0.80% and 3.65%, respectively, as of this writing.  The recent lows were 0.54% and 3.36%, respectively, for 2-year and 10-year Treasury note yield as of January 28 (see Chart 3).

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, February 9, 2011.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

More on this topic (What's this?)
Anticipating The Rate Hike
Rising Interst Rates Historically A Positive For Equity Returns
Read more on Federal Reserve at Wikinvest
OverSeas Radio Network

Leave a Reply

  

  

  

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Top 100 Financial Blogs

Recent Posts

Charts & Indexes

Gold Price (US$)

Don Coxe’s Weekly Webcast

Podcast – Dow Jones


One minute - every hour - weekdays
(requires Windows Media Player)
newsflashr network
National Debt Clock

Calendar of Posts

February 2011
MTWTFSS
« Jan Mar »
 123456
78910111213
14151617181920
21222324252627
28 

Feed the Bull