Forex Investment and Currency Trading

During the past 24 hours there have been comments by three FOMC members, including Chairman Bernanke yesterday. The general theme has been one in expressing caution about recovery.

Speaking before the JEC, Fed Chairman Bernanke struck a similar tone to the latest FOMC statement, noting that the recession is starting to fade. As with SF Yellen last night, Mr 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.

The gist of Chairman Bernanke’s comments were reiterated by SF President Yellen in a speech yesterday. Ms Yellen is the most “dovish” of the FOMC members, and therefore the fact that she was sounded very guarded optimistic about recovery is of note. Her tone could be captured in the following statement: “The fact that I can now talk about cross-currents may mean that the economy is reaching an inflection point. It’s too soon for me to be convinced of that, and I see a lot of downside risk, but at least there is some basis for optimism”. She cited “hints of stabilisation” in consumer spending and housing and noted that “the necessary inventory correction may be quite far along”. That said, she noted that “the need for balance sheet repair by households and financial firms, uncertainties about unconventional monetary policy tools, and the global nature of the recession” meant that US recovery would probably be “frustratingly tepid once it does get started”. She also argued that the main official unemployment rate understated labour market deterioration, arguing that the “underemployment rate” was 14.25%, up 6.5pp. As well she considered that deflation was more likely than inflation, albeit not in a “severe bout”. She suggested that future sources of downside risks included commercial real estate and the risk of emerging market defaults.

A predictably more upbeat tone also emerged yesterday from Minneapolis Fed President Stern (who, in contrast, considered to be slightly to the hawkish side of centre (”hawk-o-meter”)). Mr Stern argued that the initial stage of recovery in the economy was likely to be subdued, owing to the distressed state of credit markets. However, given the economy’s “fundamental resilience” and the aggressive policy response, healthy growth ought to return by the middle of next year. He argued that the threat of deflation should diminish substantially if economic growth resumed as he expected. On inflation, he considered that there was plenty of time for the Fed to withdraw excess liquidity since the relationship between money supply growth and prices holds over a period of five to ten years.

Ahead of his Congressional testimony today, Mr Stern also stressed the importance of putting new policies in place which address the too-big-too-fail issue (TBTF). He considered that incentives were “at the heart of the TBTF problem” and must be at the heart of the solution. He advocated “systemic focused supervision” (SFS), which would make “policymakers confident that they need not intervene if a large institution encounters difficulty and to put creditors on notice that they are likely to experience losses in such circumstances.” He opposed plans which simply relied on heightened regulation and increase capital requirements.