Another Big Fed Week: The Bernanke Monetary Policy Testimony to Congress

Email
    Text size

There's a key market-moving event this week investors can't miss: the semi-annual Ben Bernanke monetary policy testimony before Congress on Wednesday (House) and Thursday (Senate).

Congressional legislation known as Humphrey-Hawkins (now expired) required the Federal Reserve's Open Market Committee to report to Congress on both the state of the U.S. economy and monetary policy twice a year (February and July). The Fed Chairman testifies before Congress in conjunction with the report.

Traditionally, it had been one of the most important public appearances by the Fed Chairman, back when speeches were rare. But now with news conferences after many Fed meetings, these appearances are less important.

However, this time may be different, as it will be Ben Bernanke's last time in front of Congress before his term ends in 2014. The testimony may once again be a market moving event due to the market's recent concern about the Fed's 'tapering' of quantitative easing (QE).

Which Ben Will Deliver the Monetary Policy Testimony?

The markets have been confused lately by seemingly contradictory statements coming from various Fed members and particularly from Bernanke himself.

In fact, Bernanke's actions lately remind me of Batman villain Two-Face, aka former District Attorney Harvey Dent.

For example, one time he said that winding down QE may happen as soon as the middle of next year. But then, like last week, he flips saying the Fed will not taper the $85 billion a month bond purchasing plan until the U.S. economy is stronger.

He said, "highly accommodative monetary policy for the foreseeable future is what's needed [for the economy]."

Bernanke added that there would not be an automatic rise in interest rates either when the U.S. unemployment hit the Fed's target of 6.5%.

These statements sent the stock market solidly higher with both the S&P 500 and the Dow Industrials nearing their record highs. The S&P 500 and Dow Jones Industrial Average hit new record highs Monday closing at 1,682.50 and 15,484.26.

Traders believe the 'Bernanke put' was back in play. That is, Bernanke will do everything he can to keep stock prices higher.

So which Ben Bernanke will testify before Congress this week? Accommodative Ben or Tightening Ben?

This Week's Humphrey-Hawkins Testimony

Wall Street should anticipate that the answer, as with Batman's Two-Face, is that both Bens will be present in front of Congress.

The prepared remarks to Congress will express Bernanke's own views and will lean toward more monetary ease. But don't be surprised if, during the course of the question and answer sessions with members of Congress, if the tougher Ben comes through as he expresses the opinions of the entire Fed.

The explanation is rather simple, as pointed out by Jeffries chief financial economist Ward McCarthy.

When Bernanke is espousing his own beliefs on the economy and monetary policy, he is dovish and speaks about the still weak economy needing continued accommodative monetary policy.

But he is also Chairman of the Fed, and in such a role he must represent the entire Open Market Committee. It is in that role that Bernanke is more hawkish and speaks about the end of the bond purchase program.

Just look at the minutes of the latest Federal Reserve meeting. About half of the 19 voting members wanted to end quantitative easing by the end of this year. Meanwhile, the other half wanted to keep buying bonds well into the future.

So it should not be overly surprising that when Bernanke is speaking for the Fed as a whole, he sounds more hawkish than in previous testimonies.

The Aftermath

That leaves the likely outcome of Bernanke's Humphrey-Hawkins testimony this week to be more confusion in the marketplace as there will something for everyone, no matter their view.

Money Morning Chief Investment Strategist Keith Fitz-Gerald has his own views on what lies ahead with Bernanke and the Fed.

He believes the Fed will continue its $85 billion a month bond purchase plan for the foreseeable future.

Fitz-Gerald said "printing money is what Dr. Bernanke knows, so that's what he's going to do in one form or another."

Even if Bernanke addresses the views of the more hawkish FOMC members, he's unlikely to deviate much from his usual script.

Fitz-Gerald outlined Bernanke's actions as well as what investors should do now in this recent Fed analysis for Money Morning members - check it out, it's free! Now What: A Q&A with Keith Fitz-Gerald

Related Articles: