“The recovery of the US economy continues, but the pace of expansion has been uneven and modest by historical standards,” is how Bernanke started off his testimony in front of the House. He noted the recent “positive developments in the labor market” but said “notwithstanding the better recent data, the job market remains far from normal: The unemployment rate remains elevated, long term unemployment is still near record levels and the number of persons working part time for economic reasons is very high.” He went on talking about the economy, is little worried about inflation even with the recent rise in energy prices and called the ECB’s LTRO program “constructive.” He then talked about the Fed’s new transparency goals and inflation target and said with respect to current policy, “with the unemployment rate elevated and the inflation outlook subdued, the Committee judges that sustaining a highly accommodative stance for monetary policy is consistent with promoting both objectives.” Bottom line, while Bernanke acknowledges the better labor market (as we’ve all seen) there is no new news in the testimony as the Fed continues to embark on Defcon 1 monetary policy even though we are so far past the emergency. Keeping rates too low for too long in the mid 2000′s created ‘you know what’ and the Fed is repeating the exact same policy mistakes now.
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If only we had an exit poll of European bankers
As there are no exit polls of European bankers on why they borrowed money from the ECB at a 1% cost for three years, we can only guess. Compared with 523 banks taking 489b euros from the ECB in Dec, 800 banks borrowed 529.5b euros. The quantity was about in line with expectations and of course little changed with the 1st one but the amount of banks tempted by a 1% borrowing rate rose by 53%, also enabled by a reduction in the quality of collateral accepted by the ECB. The question going forward for the markets now is will it be a sell on the news, not just for equity markets but especially for the debt of Italy and Spain, still the two countries Europe needs to fully ringfence. At least for the initial reaction, Italian and Spanish bonds are rallying again with yields lower and the European bank index is higher by 1%, back to Friday’s close. With Draghi’s job now done for a while as there are no more LTRO’s on the docket and interest rates will likely stay at 1% next week, Bernanke takes the economic/monetary policy stage at 10am. I expect him to cover all his tracks and thus don’t expect anything new of interest.
