Financial Watch

Economists for the most part believe the Federal Reserve will raise interest rates two more times before pausing. Of course, this is subject to change depending on economic data during the coming months. In Ben Bernanke’s first public appearance since taking over the reins from Alan Greenspan, he reiterated his predecessor’s belief that the economy was expanding at a steady pace. His comments held few surprises. Most notable from his testimony last week is a lack of true concern about future inflation. Bernanke mentioned the fact high energy prices during 2005 had helped to fuel concerns over inflation. However, Bernanke also stressed that our economy was less susceptible to rising energy costs than was the case back in the 1970’s. The new Fed chief’s upbeat assessment of the economy helped to give a modest boost to stocks last week, but his neutral commentary about future interest rates helped to restrain gains.

Financial Watch believes Bernanke was much more dovish than most media reports stated. Most notably lacking from his testimony was concern over an unemployment rate of only 4.7%. Earlier this decade, Bernanke commented that 5% was full employment. In our eyes, he recognizes that technological advances and strong robust productivity gains over the past decade explains why full employment is lower than it was even just a few years earlier. Further, Bernanke mentioned a slowing housing market, giant trade unbalances, and high levels of government debt as obstacles that could cause economic growth to be lower than expected. The statements made last week are consistent with views that Bernanke is not overly concerned about inflationary pressures trickling down to consumers. This would support the Federal Reserve pausing earlier than expected if upcoming economic reports begin to show signs of weakness across parts of the economy.