Factors to look out for from Fed Chief Bernanke's testimony


Active Trader
Jan 12, 2010
Factors to look out for from Fed Chief Bernanke's testimony

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Federal Reserve Chairman Ben Bernanke will present his semi-annual testimony to the House Financial Services Committee on 24th February 2009, beginning at 15:00GMT and repeat his testimony on the next day in front of the Senate. Financial markets will be paying attention to his comments on the economy, especially any statements regarding the Fed’s monetary policy going forward.

A surprise 25 basis point hike in the Fed’s discount lending rate from 0.50% to 0.75% hit currency and equity markets late last week and initially boosted speculation that the Fed would increase its benchmark Fed funds rate (currently in a range of 0-0.25%) sooner rather than later. The move pushed euro to a 9-month low and equity markets fell as investors became fearful of the eventual tightening of monetary policy.

Bernanke’s testimony will serve as an opportunity for the Fed chairman to further clarify the Fed’s strategy, as the latest comments from other Fed officials (such as St. Louis Fed President Jimmy Bullard and San Francisco Fed President Janet Yellen) have suggested that the Fed would prefer to keep interest rates low for an extended period of time, which could mean into 2011. Futures markets have started to factor the first rate hike to occur in the third quarter of 2010 and any date specified by the Fed chief himself will affect those markets greatly.

Other important factors in his testimony will be how Bernanke views the growth prospects of the U.S., after the January FOMC minutes upwardly revised the GDP forecast for 2010 to a range of 2.8%-3.5% and also what new steps he may take to lighten the load on the Fed’s balance sheet. The latter may include asset sales or another change in emergency lending facilities, which would put a more hawkish slant on Bernanke’s strategy for the 2010, at a time when the European Central Bank is troubled by the fiscal debt problems of Greece (and other countries in the eurozone) and Japan and the U.K. are suffering from deflation risk and budget deficit control respectively.

Rather than acting immediately after each comment by Bernanke is transmitted to the various news services, currency traders should wait until the majority of his testimony is complete before acting in the direction of the broad market reaction.


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