MacroScope

What to expect from Bernanke testimony and Fed minutes this week

May 20, 2013

Financial markets this will be keenly focused on congressional testimony from Fed Chairman Ben Bernanke and minutes from the central bank’s April 30-May 1 meeting, particularly given a thin data calendar. The latter may be the more interesting one, since it will offer hints into how far Fed officials are leaning in a direction of curbing the pace of its bond-buying stimulus, potentially late this summer.

The economic backdrop has been just mixed enough to leave policymakers cautious about taking their foot off the gas. Still, if we get a few more months of strength in the labor market, Fed officials may just be able to say “substantial progress” has been made in the outlook for the labor market – their stated precondition for an end to asset buys.

Still, Harm Bandholz at Unicredit says markets should not confuse a debate about tapering bond buys with some immediate reversal of the Fed’s policy of ultra low rates.

Once the Fed talks about the exit (or unwinding/tapering asset purchases), the market is tempted to jump to the conclusion that this indicates an earlier exit. We disagree. The debate about an exit roadmap merely shows that the Fed is doing its necessary due diligence in time. It wants to make sure that it is prepared to do the right steps once the time has come. This debate does not, however, bring the exit a single day closer. In fact, the minutes are likely to show just the opposite, i.e. that at the previous meeting some Fed officials were talking about the possible need to increase the asset-purchase amount even further.

As for the testimony, don’t expect the chairman to make much news, says Roberto Perli at Cornerstone Macro:

Bernanke usually does not like to break much new ground at his testimonies, and the Fed message could be further muddled if he follows that pattern again on Wednesday.

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