February 2006

Fed Chairman's First Testimony

In his first testimony before Congress, Federal Reserve Chairman Ben Bernanke delivered his first monetary policy report with much appreciated straightforwardness. His report was received as “mildly hawkish” on inflation saying he agreed with Fed policy-makers' assessment at their January 31st meeting that interest rates may need to move higher. Mr. Bernanke said "The Fed judged that some further firming of monetary policy may be necessary, an assessment with which I concur."

Fed Chairman Ben Bernanke pointed out the increase in energy prices and the probable pass through into consumer products as a major concern. He also made a point to note the risks of a downturn in the housing market and the possibility that if it were to occur, the downturn could be more severe than many think. Mr. Bernanke believes that US households would curtail consumption and increase savings in the case of a housing slump.

We also believe that a retrenchment in the housing market would quickly flow through to many areas of the economy, which have been sustained by the massive and rapid buildup in the housing stock in recent years. The obvious speculation within the housing market is a growing concern for the Federal Reserve, just as the stock market bubble was in the late 1990s. Fed Chairman Ben Bernanke avoided any mention of “easy money” policies of the Federal Reserve that fueled these asset bubbles. Whether Mr. Bernanke can marshal a “soft-landing” in the housing market, as Mr. Greenspan did with the stock market, while tightening monetary policy remains a concern for the markets. Absent a catalyst, the market is likely to remain entrenched within a narrow trading band.