What Bernanke Didn’t Say

March 25, 2010


Ben Bernanke’s testimony this morning before the House Financial Services Committee was rather uneventful from a news standpoint. But Wall Street analysts have managed to scrape some meaning out of what the Federal Reserve Chairman didn’t say. Markets have been on tenterhooks about the possiblity that the U.S. central bank might further raise the discount rate it charges to banks for emergency loans.

In a report following Bernanke’s testimony, JP Morgan chief U.S. economist Michael Feroli said Bernanke’s silence indicated the market might be getting ahead of itself:

Bernanke did not signal an imminent hike in the discount rate this morning; he did reiterate the extended period language and altered how he characterized asset sales.

On the latter point, Bernanke’s answers to some specific questions made some investors think the Chairman was warming up to the idea. This would corroborate statements by St. Louis Fed President James Bullard, who has said on more than one occasion that that there is greater support for asset sales as a principal exit strategy “than you might think.”

Still, given ongoing weakness in the housing market, which saw new home sales drop to a record low in February, it is unlikely he meant the discussion as anything more than a theoretical excercise for the foreseeable future. Here is Bernanke, in his own words, on the effectiveness of MBS purchases:

The housing market, Congressman, as we all know, is still quite weak, and we’ve just seen some very weak sales numbers just the last few days. But we do believe that — well, first of all, that the mortgage markets are performing better and mortgage rates are quite low from a historical perspective.

And moreover, our purchases of mortgage-backed securities were also intended to create better conditions in private credit markets more broadly.  And we’re seeing, for example, record issuance in the corporate bond market. So we think that our program has been effective.”

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