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  • Bernanke's Testimony to Congress and FOMC Minutes Preview



    by tothetick.com

    THE IMPORTANCE OF BERNANKE’S TESTIMONY

    Fed chairman Ben Bernanke’s testimony to Congress will be important in setting the tone for the markets (particularly the dollar, equities and US treasuries), as traders hunt for clues on when the Fed is likely to ease its rate of asset purchases.

    The greenback surged last week, with the dollar index reaching a three-year high, on the back of traders’ expectations that improving US economic data will lead the Fed to begin tapering its programme of quantitative easing, possibly as early as the middle of this year.

    Minutes from the FOMC’s latest policy meeting in May will follow Bernanke’s testimony. However, it is likely that Bernanke’s testimony may take the edge off this release, in terms of market impact.

    FOMC POLICYMAKER UNCERTAINTY

    Bernanke’s testimony is crucial, given the mixed messages from Fed officials in recent weeks. For example, Charles Plosser has suggested decelerating the rate of asset purchases, also suggesting that the Fed shortens the duration of the bonds it currently holds.

    Some FOMC members, like John Williams, are in favour of tapering asset purchases by the end of this year. On the other hand, Eric Rosengren has argued that now is not the time for the Fed to taper its asset purchases.

    And this week, Richard Fisher came out in favour of slowing purchases of mortgage securities, saying the housing sector no longer needs the Fed’s support.

    Sebastien Galy, an analyst at Societe Generale, says “the Fed is slowly moving out of the ultra-dovish camp, as the Bernanke clan reassesses the risks for the Fed balance sheet and the economy of ultra-easy conditions for so long.”

    It appears as though the Fed is eager to push the debate into the public domain. Simon Smith, an economist at FxPro says that “[the Fed] is keen not to scare markets when the [tapering] does eventually happen, hence the propensity to talk openly about it.”

    WHAT CAN WE EXPECT?

    What is definitely known is that the Fed is intent on tapering asset purchases. When is less clear – it is generally accepted that it could be anytime from the middle of this year, all the way out to 2015 (assuming that the tone of economic data improves – especially unemployment and inflation).


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