Summary of Bernanke's Testimony

Ben Bernanke did not guarantee a QE3, but he also did not take that option off the table.  Although he appeared a bit nervous in the beginning (compared to his previous testimonies), he got into the flow of the 'game' and started joking with lawmakers about sleeping habits and things such as "a trillion here, a trillion there", referring to the US debt.  We will provide some of the main points he made during his testimony.  Regarding QE3, he basically said that they have not yet made a decision as they first have to review economic data and update their projections to see how well or badly the economy is doing.  After that, they will decide on whether or not to add another QE, and that decision may be announced (if needed) at the next FOMC meeting on June 19 -20.

Bernanke's main points:

• The Fed will continue to maintain a highly accommodative monetary policy, but its effectiveness will depend on whether Congress gets its act together.
 
• Have not yet decided on a QE3.  Must answer these questions first: How strong will the economy be going forward?  Will economic growth be enough to improve state of employment and offset the negative impact of the end of the catch-up rate?  (The catch-up rate in employment is discussed in more detail below.)
 
• He said that tax and spending policies should increase incentives to work and save. (Save?  Savings?  How can Americans save when interest rates are so low, pushing everyone to make risky bets?)
 
• US economy is growing at a moderate rate
 
• Labor market has improved, but the last three months’ employment data has been disappointing.  Such disappointment is due to not only the unusually warm weather this year, but also due to last year's employment catch-up transition that raised expectations too high.  Basically, after the beginning of the recovery, the state of employment did some ‘catching up’ in terms of accelerating hiring, which explains the encouraging NFP figures we saw in late 2010, and early and late 2011.  Now, Bernanke believes in order for jobs to continue to grow, economic growth needs to continue at a higher rate.
 
• He admitted that income growth is only modest, but believes lower energy prices will help. (Let's see if Obama listens to Bernanke and therefore won't try to help Israel attack Iran; or if he will listen to Netanyahu, attempts an invasion of Iran and sends oil prices back up above $100 or maybe around $125 - $150)
 
• He has seen good demand for US exports. (But given the slowdown we are seeing not only in Europe but also in some emerging economies, will such demand continue?)
 
• He views households and businesses as still being cautious in terms of spending and hiring, respectively.
 
• The housing market is improving slowly, but lending standards appear to be tightening up a bit again and there is still backlog of foreclosures that could pressure prices.
 
• He believes inflation is under control. (It appears as though he's is assigning zero probability to a possible war with Iran, and/or he doesn't think economic growth will pick-up anytime soon.)

Regarding economic data, April's consumer credit numbers, which were released at 3pm (ET) today, were disappointing.  Consumer credit increased $6.5bil from March (which has been revised down), nearly half the $12.7bil that economists expected.  Revolving credit balance went down $3.4bil, while non-revolving went up by $10bil, 'driven' mostly by auto and student loans.  Given the disappointing job numbers, we would expect to see a slowdown in the rate of increase in non-revolving credit.  After a decline in 2008, non-revolving credit outstanding increased 2.5% and 5.7% in 2010 and 2011, respectively.  In April, it increased at an annual rate of 7.1%.  We expect such rate to come down to between 3.0% and 5.0% by the end of 2012.

Overall, the economy and the markets are looking for Bernanke's helping hand.  This was demonstrated pretty clearly in the equity markets as the S&P 500 closed pretty much flat (down 0.01%) after being up as much as 1.1%, after finally realizing that there is no guarantee of a QE3.  Now bulls are likely hoping for further disappointing data to push Bernanke and the Fed to take action.  Technically, the support and resistance levels that we discussed this morning have not changed: 1291 and 1325, respectively.