Forex Investment and Currency Trading

Fed Chairman Bernanke’s testimony to the Joint Economic Committee struck a similar tone to the latest FOMC statement, noting that the recession is starting to fade. Bernanke pointed to the pickup in consumer spending in Q1 and leveling off in existing home sales as indications that the pace of contraction in the economy may be slowing. However, he noted that business investment remains very weak and that the deterioration in commercial real estate should weigh on growth. The extent to which businesses can liquidate inventories will dictate when production can resume. Looking ahead, Bernanke expects economic activity to start to turn up later this year as housing stabilizes and the inventory adjustment slows. However, he expects the recovery to be gradual and for the pace of economic growth to remain below the long-run potential for a while. Moreover, the recovery is contingent on a “continuing gradual repair of the financial system” and that a “relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall.” On price stability, Bernanke expects inflation to remain low given the slack in the economy. However, he argues that stable inflation expectations should limit further declines in inflation.

Bernanke also noted that conditions in financial markets have improved as well. In particular, he points to markets for short-term funding, where an increase in private lending has reduced dependence on the Fed facilities. He also noted that ABS lending has picked up partly because of the TALF, that mortgage rates have declined and that equity markets have rallied. In the Q&A, Bernanke was asked about the Fed’s eventual exit strategy. He said that there will be a natural unwind because the Fed facilities will become less attractive as conditions normalize. In fact, the short-term credit facilities have already started to shrink. Bernanke said he is confident that the Fed will withdraw liquidity in a timely fashion to prevent inflation but not too soon to dampen the recovery.