Insights: A Guide to Bernanke’s Humphrey Hawkins Testimony

Posted March 1, 2011 by CLeahey

[private]

• Bernanke’s upcoming Humphrey Hawkins testimony will continue to repeat the theme that the economic outlook is improving but is not yet good.  The doves at the FOMC cannot consider the recovery fully established until they see a sustained period of stronger job creation, which has not yet unfolded. Bernanke may have to address the potentially looming potholes of higher oil prices and a major cut in Federal spending, which may challenge the conventional wisdom that the Fed has gotten much closer to the exit sign. 
• Despite the recent pickup in the PPI and CPI, the Fed continues to view the inflation outlook optimistically.  The typical FOMC member thinks the degree of economic slack is large enough to offset the spillover effects of higher commodity price so that headline and core inflation will remain low.  The Fed would be willing to ride out a large oil price spike, since it could threaten growth.
• It is too soon for Bernanke to make another u-turn on the exit strategy and to say that “strong growth” has caused him to “rethink policy.”   A fleshing out of the exit strategy awaits stronger employment gains for several months and should unfold in the second half of this year. We lean against a formal policy rate hike this year, but this may be a distinction without a difference to investors.

humphrey_hawkins_0311[/private]