Bernanke Testimony

Ben Bernanke is testifying on "The economic outlook" before the Joint Economic Committee, U.S. Congress (Text of speech here).

As we noted last week in FOMC Statement, Revised for Reality, the Fed is vey much aware of the box they are in.

Here’s the highlights from BB’s testimony:

• Economic growth in the United States has slowed in recent quarters to an annual rate of roughly 2 percent.

• The principal source of the slowdown in economic growth has been the substantial correction in the housing market.

•  The near-term prospects for the
housing market remain uncertain; Developments in subprime mortgage
markets raise some additional questions about the housing sector.

• Turmoil in the subprime mortgage market has created severe
financial problems for many individuals and families, and the implications of these
developments for the housing market as a whole are less clear.

•  Business spending has also slowed recently. Expenditures on capital equipment
declined in the fourth quarter of 2006 and early this year.

• The weakness in housing and in some parts of manufacturing does not appear to
have spilled over to any significant extent to other sectors of the economy.

• Outside the United States, economic activity in our major trading partners has
continued to grow briskly.

• Although core inflation seems likely to moderate gradually over time, the risks
to this forecast are to the upside.

Lastly, the risks to this forecast:

"This forecast is subject to a number of risks. To the downside, the
correction in the housing market could turn out to be more severe than we
currently expect, perhaps exacerbated by problems in the subprime sector.
Moreover, we could yet see greater spillover from the weakness in housing to
employment and consumer spending than has occurred thus far. The possibility
that the recent weakness in business investment will persist is an additional
downside risk. To the upside, consumer spending–which has proved quite
resilient despite the housing downturn and increases in energy prices–might
continue to grow at a brisk pace, stimulating a more-rapid economic expansion
than we currently anticipate."

This testimony makes clear (to me at least) drew precisely the wrong conclusion from the FOMC statement last week. Bernanke is now correcting that error via this speech.

Thanks for coming by! We’ll see y’all agin real soon!


Update II March 28, 2007 2:40 pm

Bloomberg is even more stark:

Bernanke Keeps `Inflation Bias,’ Sees Growth Risks
Craig Torres and Scott Lanman
Bloomberg, March 28 2007


Update March 28, 2007 11:09 am

WSJ has an update:

"Federal Reserve Chairman Ben Bernanke said Wednesday that despite risks to both growth and inflation, the current stance of policy remains the right one to foster sustainable U.S. economic growth and a gradual easing of price pressures.
[Ben Bernanke]

That suggests that despite recent signs of subpar economic growth, the Fed isn’t inclined to lower rates anytime soon, especially with underlying inflation, in Mr. Bernanke’s words, "uncomfortably high."

"To date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing of core inflation," Mr. Bernanke said in prepared testimony to the Joint Economic Committee of Congress.

Bernanke Expects Sustainable Growth


The economic outlook
Before the Joint Economic Committee, U.S. Congress
Testimony of Chairman Ben S. Bernanke
March 28, 2007

Bernanke Expects Sustainable Growth
Doesn’t See Subprime Turmoil Spreading

March 28, 2007 10:53 a.m.

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What's been said:

Discussions found on the web:
  1. Peter commented on Mar 28

    Feb Durable Goods were weaker than expected following the big drop in Jan. The headline # was up 2.5% vs the consensus of 3.5% and ex transports fell .1% vs an expected gain of 1.8%. The Jan # ex transports were down 4%, revision left unch. Non Defense Capital Goods ex Aircraft were down 1.2% following a 7.4% decline in Jan (revised from -6%). This pure capital spending # is now down 4 out of the last 5 months so notwithstanding healthy corporate balance sheets, companies are very reluctant to invest in light of the changing economic landscape. Actual shipments of durable goods, which gets directly plugged into GDP, was down .8% following a decline of 1.5% in Jan. GDP could print below 2% for Q1.

  2. Mike M commented on Mar 28

    With Ben Bernanke and his crack team at the Fed, I have no doubts he can guide us to a soft landing, no make that a touch and go, skyrocketing to a continuation of the economic boom. Profit margins will stay at record highs, permanently. Stocks will continually set new highs. A new paradigm of higher valuations will continue, indefinetly. My future is secure. Yes, I have a lot of faith in Ben Bernanke. And you should too. God bless the Federal Reserve.

  3. glenn_in_MA commented on Mar 28

    The “risk” statement….what a clever way of saying what will likely happen going forward without actually saying it will happen.

    And what about this part of the “risk” statement:

    “…..To the upside, consumer spending–which has proved quite resilient despite the housing downturn and increases in energy prices–might continue to grow at a brisk pace, stimulating a more-rapid economic expansion than we currently anticipate.”

    Does anyone with just a shread of common sense believe this upside risk actually exists…please. Interesting choice of words as well — that increases in energy prices (should this be read as “inflation”?) might lead to a more rapid economic expansion. Why no explicit mention of the inflation risk? Plus the last I knew, increases in energy prices — as in energy shocks — lead to recessions, not rapid economic expansions!

  4. Michael Schumacher commented on Mar 28

    This is classic fed-speak:

    “Although the turmoil in the subprime mortgage market has created financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear,” Bernanke said.

    Where do you suppose these “many individuals and families” live? certainly not in cardboard boxes as that statement implies that these people who they at least acknowledge are being affected don’t live in a house that’s part of the housing market???

    I hate to say this but bring back Greenspan….sad to say but the above statement implies that only the individuals are affected and not the homes that they live in.

    Classic bullshit.
    I may stay in Geneva for the rest of my days.


  5. LAWMAN commented on Mar 28

    So this is a good time to buy the dips, right?

  6. Peter commented on Mar 28

    Bernanke in his testimony sounding somewhat hawkish by reiterating that inflation is the “predominant policy concern” and economic growth will be moderate in coming quarters as he has yet to see a spillover from housing and manufacturing. He also reiterates the Fed’s belief that core inflation will slow “over time.” Bottom line, his forecasts are based on HOPE that the economy will weather the subprime, housing problems and inflation will recede as inflation expectations appear “contained” according to him. For those looking for a cut soon based on their interpretation of last week’s FOMC statement, they didn’t get it in the testimony.

  7. Strasser commented on Mar 28

    At least one of the congress people appears to have a brain is asking BB ‘why we discontinue information such as the M3’…which happens to be sailing along at a pretty healthy 11% clip, according to a private source.

  8. wally commented on Mar 28

    No point in trying to read to much into ‘nuance’. Any way you parse it, Bernanke does not know the future. Nobody does.

    Flyspecs in the pepper.

  9. anderl commented on Mar 28

    Inflation is a major problem (said ‘global’). Cheap money has increased money supply across all the major G8 nations. The problem is that even with tightening cheap money is still freely available. More resilient countries like the US, EU, and UK were able to recover quickly from the global recession but countries such as Japan were much deeper into it and as a result had to keep their policies accommodative for much longer and that exacerbated the inflation problem. Now that Japan is seeing strong growth they are starting their tightening policy.

    Japanese tightening policy is a major problem for hte rest of the world. As the BOJ buys back Yen and returns Euro, Dollars, and Sterling that puts more of those currencies into circulation depreciating the value of those currencies on the world market. As a result those currencies fall in value as there is really little demand to buy them at this point with such weakness in their economies.

    The Central Banks of the respective countries have one of a few options to create demand for their nations currency. The first and most prevalent is jawboning fedspeak. Encourage buying of US assets by foreign investors. Patriotism at its finest. If the market fails to believe in this rosy picture then the Fed repatriates the money and retires it reducing money supply. In order to do so the financial means has to be there. Congressional spending and what not has generated debt and deficits that keeps the US from being able to buy back dollars. The last option is to raise interest rates to encourage investment.

    The problem with the last option of raising rates to encourage investment, is that you are promoting investment in a country that is “overvalued” for the rate of interest it is trying to offer. the economy is so badly beaten that what you are really doing is bottom feeding hoping that when it does recover you will be rewarded for your risk. Treasuries take on the look and feel of a junk bond.

  10. S commented on Mar 28

    Strasser, that is Congressman Ron Paul. Although elected as a Republican, he’s a libertarian and strong believer in Austrian school economics.

    He also asked if the Working Group on Financial Markets, more popularly known as the Plunge Protection Team, had interfered in the financial markets on February 27 or anytime since. BB denied they had.

  11. kharris commented on Mar 28


    Note that the upside risk has a circular element to it. The risk is that consumer demand will be stronger than expected, but it is predicated on overall growth being stronger than expected. Why would overall growth be stronger than expected? No good reason. What it seems to boil down to is that growth may be too strong if growth is too strong. Bernanke’s list of downside risks is both more extensive and non-circular. The downside risks are all just recent bad news, if it gets worse.

  12. mark commented on Mar 28

    Sounds like the boys over on wacker street are going to turn this market around and finish the quarter on new index highs. watch them close this down day at unchanged for a start.

  13. Robert Coté commented on Mar 28

    “We are printing too much money but rest assured we have no intention of changing that situation.”

  14. donna commented on Mar 28

    The economy is sustainable.

    Until it isn’t.

    Everyone got it, now?

    Go Ben! Send that helicopter over *MY* house!!!

  15. Michael Schumacher commented on Mar 28

    If the fed is not juicing the markets, as they have denied, then why have they “auctioned”-I love how they catogorize it-repo. agreement almost every single day since February 26th?? I guess it’s just a coincidence that the treasurey does the same thing albiet with less frequency.

    Seems they are more worried about themselves rather than the people (ala you and me) that make up the economy in the first place.


  16. alexd commented on Mar 28

    First to lawman.

    Yes buy on the dips, buy such things as etfs that are negatively correlated to the market.

    Buy energy. I hate to say, “here we go again” but


    If any of you think it is an accident that the oil companies work on their refineries when the driving season approaches I would like to sell you a bridge. IT is not the only way but it can put a crimping the gasoline supplies even when oil was going down. This bit with Iran is like throwing gasoline on the fire. Also please lets not forget that the latest version of the Patriot Act lets our president act against Iran w/o going to Congress. Supposedly the Israeli lobby pushed hard for that one. The fact that Pelosi caved on rescinding it shows me how much spine she has. (Don’t give me any “you’re an anti Semite” crap about this I have relatives living in Jerusalem, I am just passing on the information not making a judgment on their motives.)

    So we are one missile away from oil at 100 dollars a barrel. And it does not matter whose missile. There will be more after that.

    I really hope this does not happen.

    But mainly look at the inverse relationship of the dollar to oil prices. That should tell you where to bet.

    Until we start to see the financials go up I suspect we are in for some rocky sledding.

    But I think stocks like ipsu are real sweet at this immediate time.

  17. Michael M commented on Mar 28

    Maybe I’m getting senile, but when was the last time that we sold off in the morning and the dip was bought (i.e. the S&P rallied 10 points off the early low – as usual) and THEN the market sold off in the afternoon without any bull muscle? Some will explain the movements as reaction to Ben “Bush Booster/Boo Basher” Bernanke’s “testimony”, but regardless, this action looks somewhat new to me and perhaps it’s a tell of what’s to come.

    Plus, I sense fine people like Barry, Caroline Baum and Todd Harrison getting more bearish over the last weeks (and Cramer getting less loud, believe it or not).

    What else is to come? Earnings season. Analyst consensus is that median growth in DOW 30 EPS from 07 to 08 will be 11.0%. This leaves quite some room to the downside.

    And to make a total fool of myself, a prediction. At some point in April Barry will officially give the go ahead to lean short (unless the market pulls the trigger before he does).

  18. Tinhat Man commented on Mar 28

    Wow. The Senate guys actually asked some decent questions today.
    My tinhat persona says the top will come right after laws are changed that limit shareholder lawsuits. Have to protect our golf buddies.

  19. Dirk van Dijk commented on Mar 28

    Yes there is a risk that the real economy will be too hot, in the sense that there is some infitensimal mathmatical possibility of it happening. There is also a risk that the Yellowstone caldera will explode over the 4th of July and cover the easter 2/3 or the country in 3 feet of volcanic ash. It is a risk, but I would not make any investment decisions based on that risk.

  20. alexd commented on Mar 28

    Heard Maria b on cnbc interview 3 economystic types at the close today. She actually seemed to think it was funny that we could have both a slowing econimy and inflation.

    Maria, your mom should have been taking you to the supermarket during the Ford/Carter years.

    Yes they can exist together and yes it is ugly.

  21. fred c. dobbs commented on Mar 28

    Hey Barry, who’s this wingnut who keeps blathering about the Fed’s repos as if they were some kind of smoking gun showing how evil Ben & Co. are?

    Michael Schumacher said: “If the fed is not juicing the markets, as they have denied, then why have they “auctioned”-I love how they catogorize it-repo. agreement almost every single day since February 26th??”

    In fact, the Fed executes repos (repurchase agreements) almost every day. (The data are on the New York Fed website for all to see.) It’s how the Fed manages the money supply and maintains the effective federal funds rate at the desired level. The level of repos in March is nearly identical with February, January, December … Some smoking gun.

    If there were any “juicing” going on, you’d see the effective federal funds rate falling. It’s not.

    Barry: I know you’ve written about Treasury Department repos as well, implying that they are a sort of backdoor way to add liquidity to the system.

    In fact, that’s how the Treasury manages its surplus cash, by depositing it in banks for a few days. (It goes to the highest bidder). These repos are also running at typical levels of about $3 billion to $5 billion a day. This money is then withdrawn after a few days, and then deposited again in a new repo auction.

    The key to both of these operations is that they are temporary. The private sector returns the money to the government (with interest) after just a few days.

    In a trillion-dollar market, I think it’s a misnomer to think of this amount of money as “liquidity”… it’s more like lubrication.

    Thoughts? (as opposed to black-helicopter conspiracy theories)

  22. Lauriston commented on Mar 28


    If you think it is an accident that the Iranians captured those Brits round about now just before “driving season” then I would like to sell you a bridge:)

    Everyone is making money, the Iranians, Saudis, Americans etc. The rest are just pawns… all these rumors etc. are making it even better

  23. Michael Schumacher commented on Mar 28


    I never implied that a “fleet of black helicopters” or whatever you want to mis-characterize what I’ve said. The simple fact is the YES the Fed and treasurey do inject capital in the market. Had you been paying attention you would see the links that I have used are the very same ones you speak of. SO call me a conspiray theorist that’s fine, it’s you’re right. But liquidity or lubrication it’s all the same. It’s too bad you can’t step back and realize that. Yes they pay it back however it’s WHAT they do with it. Sheesh you sound like the guy that takes the paid back amount right off the top and restates the original amount… if it never occured in the first place.

    >>In a trillion-dollar market, I think it’s a misnomer to think of this amount of money as “liquidity”… it’s more like lubrication.<< That statement tells me all I need to know. I bet you believe in Santa Claus and Easter Bunny too. >>the level of repos in March is nearly identical with February, January, December … Some smoking gun.>>

    Care to go back little more than 4 months?? or does that data sample do more to state your “case” than anything else. How long has the market been pushed up?..longer than 4 months.

    How about taking a look at the last 2 years?

    But you knew that……there is a reason why we no longer have the M-3 report, it’s because it would show an insane amount of liquidity..oh sorry “lubrication” going on.


  24. alexd commented on Mar 28


    Well I am not sure if you are being sarcastic or not. But if you are going to game a system for advantage, you do not increase supply before demand, you decrease it.

    I have no idea of the motivation of the Iranians in capturing those brits, if they did it to increase revenues well then they are a lot smarter than most.At least in terms of cost. But not all things that might cause an increase in the price of oil are manipulated.

    Of course we all realize that international oil has machines that cause hurricanes in the Gulf of Mexico!

    And those rocket directed asteroids heading right for Libya……

    On the other hand you can slow boats down, and you can manipulate refineries. Somethings are black swan events and others we control.

  25. Bob A commented on Mar 28

    reading between the lines

    “Federal Reserve Chairman Ben Bernanke said Wednesday that despite risks to both growth and inflation, the current stance of policy remains the right one to … uuh … give us an out … no matter what happens”
    [Ben Bernanke]

  26. VJ commented on Mar 28

    The weakness in housing and in some parts of manufacturing does not appear to have spilled over to any significant extent to other sectors of the economy.

    OK, just one question: Barrel or windowpane ?

  27. stylizedfact commented on Mar 29

    “OK, just one question: Barrel or windowpane ?”

    When in a bind, use both.

  28. Michael SChumacher commented on Mar 29

    On a final note….something that I can agree on with “fred”, please let’s have some color on this Barry……I’ve asked for a few weeks now and nothing about it.

    I gather it must be career suicide as there is absolutly no mention in any semi-mainstream media, a few blogs however I do understand why it’s not covered as the second anyone suggests that something is amiss it brings out people with the attitude that “fred” has dispalyed so I can say I understand but do not condone the lack of any coverage on this issue.

    Finally it’s not about what the fed does with the money, they are the enabler in all of this …that has never been my arguement…it’s what is being done with the money that the brokers recieve. THe fed is the crack dealer plain and simple..the brokers are the addicts. Both need to stop and let the market decide which way to go.

    Until we get that we continue to move in a peculiar and un-natural way.


  29. anderl commented on Mar 29

    Michael SChumacher: I recommend you take a deep breath and try not to read too much conspiracy into what the Fed and Brokers do with the money. There is very little manipulation going on. I’m not saying there isn’t any but for the amount of money involved and the few who are doing it there is very little effect on the market.

    The problem is that people see the system through their own biases. If they have felt cheated by the markets it only stands to reason that they should blame some external force that caused them frustration in their investments. When the PPT was devised back after Hull saved the market from completely crashing everyones has it burned into their minds that that organization controls every fractional percentage move in the markets. In reality it doesn’t.

    What the temporary open market operations provides in what fred suggested, “lubrication”. A lot of money is transitioning through the markets (currency, equity, bonds, banks, corporations, workersconsumers and their accounts). The transaction of monies is very fast but is still not realtime. There is a lag to any monetary transfer. When you move money from a savings account at Bank A to Brokerage B an electronic transfer does occur and is fairly fast but it still has to be backed by currency and verified. I can write a check for a product and receive the goods and the store reports the transaction immediately but the bank that holds the currency that was earmarked for that transaction does not know it yet. In the time before the accounts are squared away the economy is bloated by that extra money. The store accounts for an increase but the bank has not. These lags are what the Temporary Open market Operations are accounting for. They handle the transitioning of money between accounts, not just domestically but the exchange of foreign currencies as well. The Fed is always running operations on a daily basis and if you do the research they tend to renew high amounts EVERY Thursday to account for the weekend to make funds available when the desks are closed on the weekends since currency is still transacted over these weekends. People still shop.

    And the manipulation you are referring to several months ago that was supposedly injects into the market are little more that lubrication to support the new money that is rolling in. Corporate tax receipts and the extension of credit and storage of money for the buying sprees that are the Christmas holidays. What you are seeing is not a cause but an effect of the psychology of the economy.

  30. Michael Schumacher commented on Mar 29

    Once again…the Fed/Treasurey supplies the “lubrication” and I am supposed to believe that it just sits in a bank and is only there to back other transactions??

    Sorry that implies that the orignal reason to do it is followed to the absolute reason-as stated on the Fed site- for said repo’s. We all know when brokers get any money…whether from you, me other clients what they do with it is there discretion-afterall it’s not there money so who cares what they do with it. I find it hillarious that they all of a sudden find some “morality” and use that money for only the purpose that you state.

    Not in a New York minute do I believe that.


  31. anderl commented on Mar 29

    Michael Schumacher: The original reason was the intent to prevent a run on the banks and more recently a run on the markets. The 1929 stock market crash was exacerbated by the discovery that the banks had loaned out all of their currency deposits. There was no more money to loan and most traders were already margined to the hilt. Since money was backed by gold you couldn’t just create more. So the market peaks because there was no more money to give for short or long positions.

    The knowledge was leaked and a run on the banks ensued forcing a call on all loans. that hurt a lot of people. Not just investors but property and business owners who went bankrupt and were forced to close their businesses or evict their homes.

    Bank runs could easily be recreated if banking institutions were too far extended with loans and with the faster pace of society and electronic transactions a lot of money was freely floating. A bank run could easily be generated around events where it would be known that account holders were overdrew deposits while borrowers overextended credit. To prevent this open market operations allow institutions the ability to lend each other funds needed to back transactions. it is not a question of morality but survivability, banking institutions know that it is under their mutual best interest to keep each other from going insolvent from engineered runs. Open Market Operations and Fractional Reserve Banking allows for the ability to manage the float of the economy to not just prevent a domestic bank run but also to counter economic assaults like that of Soros and the Sterling.

    It is mundane and not as exciting as some engineered process of stealing money from the retail investors or to keep the nation insolvent so the rich get richer or what ever the pundits are spewing but it is what it is. Yes it can be games and has been done so by the likes of Credit Suisse and friends but it is the lesser of known evils. To remove the open market operation and fractional reserve system would allow financial warlords to effectively and more directly damage smaller banks or collectively go after larger ones.

    You are not going to get any level of understanding about how or why the system is in place reading these posts or those who have even less of an understanding of it. People who keep bringing up the PPT are a perfect example of that. I don’t care if you believe be or not. This is my job and I do this day in and day out, and to see posts like yours over and over again on the internet message boards and blogs are laughing riot. You guys go on and on about it and never do you even hit the board side of the truth on the matter. It would be like a saying that there is a collective collusion between the computer engineers at every major world corporations to delete all your money just because they have access to it like you have access to the documents on your computer. Go get educated on the subject of open market operations and the Federal Reserve rather that making yourself look ore like the fool.

  32. Michael Schumacher commented on Mar 29

    Laugh all you want. Explain any way you like…It’s about intent and reality with you explaining the intent and I focus on the reality. The reality of it is far different from the intent. Sure color me a nut job or conspiracey theorist as I do not fully believe that there is a massive collusion (or whatever you try to explain it as) black helicopters etc…..

    I do read alot into what Paulsen did with the Working Group on Finance( that happened to be dormant for quite sometime)…reconviened, coincidentally at the same time that the M-3 report just simply vanished. Whatever… It’s not in your textbook so you believe what you like.

    You are describing Apples and I Oranges, the truth is somewhat in between I suspect but merely placing your hat in the camp of a textbook explanation as to why it existed and was created many years ago is not what I call a smart way to interpret any information, especially when we are talking about now…. not 1929.

    The “original reason” for it is fine and I accept that-I do not dispute that-however the original reason for having it has outlived the intent upon which it was created for and a market that can react quickly and correctly exists in it’s place now. An additional example is the SEC’s insistance of the uptick rule. Here’s an archaic rule that never should have lasted as along as it has, but the original reason for having it has become irrelavant..the same goes for you textbook reason for the Repos.

    It is a system that is being abused….if you can’t see that….that’s your problem.


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