Get Ready for Carry Trade to Unwind

The semiannual Monetary Policy Report to Congress, always a much-anticipated event, was less so than usual last week. Federal Reserve Chairman Ben Bernanke delivered a review that had been thoroughly discounted. As had been foreshadowed in Federal Open Market Committee minutes, he portrayed the economy as navigating a transition from an upbeat tempo "to a more sustainable average pace of growth," while "inflation pressures appear to have abated somewhat" and the unemployment rate "remains low."

I don't know if Goldilocks got mentioned by name, but a mid-single-digit Misery Index (inflation + unemployment) provides only tofu, not red meat, to the senators and representatives who apathetically received this good news. In fact, the top-line macro review was so bland and uncontroversial that questioners were forced to dig down a level to the issue of the distribution of the wealth being generated by this well-behaved economy; high profits are prima facie evidence to some that workers are getting shortchanged.

In contrast to his predecessor, Bernanke would not shinny up the proffered pedestal to declaim on the matter, demurring that such political value judgments belong in the legislative realm and not in monetary policy.

The finance ministers who met at last week's G-7 meeting concurred with the Fed's view that, while things might go wrong and there is always room for improvement, it's pretty easy to sound like a nitpicker in any criticism of current conditions. The Europeans aren't happy with the 10% depreciation of yen vs. euro in the past year, but the ministers managed it as hallway discussion and kept it out of the official communiqué.

Not much has changed lately in the markets' perception of economic activity and the balance of risks around current trends, and the Fed's official viewpoint has been a steadying factor. No news is good news, apparently, because the prevailing market mood appears to have brightened.

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Jim Griffin is economic consultant and portfolio adviser to ING Investment Management and its Hartford-based unit, ING Aeltus, which manages institutional investment accounts and acts as adviser to the ING Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.