Macro Wrap – Bernanke Testimony and FOMC Minutes

by Enis May 22, 2013 7:06 am • Commentary

After Hilsenrath’s article about 10 days ago hinting at potential tapering of QE later this year, traders circled today’s Bernanke testimony in front of Congress as the key date for confirmation or rejection of that idea.  Bernanke is slated to speak at 10:00 am EST in front of Congress, and the FOMC minutes will be released at 2:00 pm.

Here is what Jan Hatzius of GS research expects from today’s commentary:

As far as monetary policy is concerned, surprises on the two sides of the dual mandate have pushed in opposite directions. Some key labor market measures have improved much more quickly than we had expected. This is most visible in the sharp drop in the unemployment rate, which is already two-tenths below the 7.7% rate we expected for year-end, and to a lesser degree in the 208,000 average gain in nonfarm payrolls over the past six months. However, other indicators such as the household survey of employment, the hiring rate, and labor force participation paint a more subdued picture. Accordingly, our labor market tracker–which extracts the underlying trend from 24 different labor market indicators–has only been consistent with a moderate increase in payrolls of around 150,000-175,000 per month; in addition, we still believe that employment remains about 4% below potential when we consider not just the elevated unemployment rate but also the depressed labor force participation rate.

Pushing in the other direction has been a significant inflation undershoot relative to our expectations. Admittedly, a significant part of this undershoot is due to weakness in commodity prices and non-market components of the PCE index, such as implicit bank charges for “free” (but non-interest bearing) checking accounts. But even the core market-based PCE index is likely to show a year-on-year inflation rate of just 1.2% in April and our core inflation tracker, which includes a broad range of indicators, is likely to show 1.3%.

In our view, the still-large amount of labor market slack and the weakness in inflation imply that it is too early for Fed officials to let up in their efforts to boost growth. If our estimate of a 4% total employment gap is correct, the potential labor market benefits from continued accommodative policies are still substantial. And while inflation expectations have remained stable so far, we believe it would be risky for the FOMC to test this stability by delivering a hawkish monetary policy surprise anytime soon.

We therefore expect a steady-as-she-goes monetary policy message from Chairman Bernanke in his testimony to the Joint Economic Committee of Congress on Wednesday, and probably from the June 19 FOMC press conference as well. This would be similar to the speech by New York Fed President Dudley on Tuesday. Dudley noted that he “could not be sure which way–up or down–the next change [to the pace of QE] will be” although his central expectation is clearly that it will be down. We believe his remarks are consistent with an expectation on the part of the FOMC leadership of the first tapering step at the September or December meeting. Given that our own views on economic activity and inflation are a bit more dovish than the Fed’s, we believe that the risks remain evenly distributed around our central forecast of a December tapering announcement.

Personally, I don’t expect any surprises from Bernanke either.  I do think, however, that markets (bonds, stocks, and the dollar) could all make big moves today and the rest of the week for the sole reason that traders are antsy, and might want ot modify positioning even if all they hear are subtle hints.  In short, I’m much more interested in the markets’ reaction than in Bernanke’s actual comments.  And I’m least interested in what headlines fill the media this evening, when most journalists suit the stories to match the market’s reaction, coming up with ex post facto explanations to please their readers’ need for a “reason” for the market’s moves.