Bernanke Takes Middle Ground

The Fed chairman dispels hopes for a near-term rate cut but isn't terribly hawkish either.
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Federal Reserve

Chairman Ben Bernanke gave few hints about the future of monetary policy in

a speech Tuesday before the National Italian American Foundation in New York.

The U.S. economy has slowed, but "the deceleration in economic activity currently under way appears to be taking place roughly along the lines envisioned in the Federal Reserve's July report," the chairman said.

Bernanke suggested "real GDP growth this quarter is likely to be in the same general range that it was in the second and third quarters" when it averaged 2.1% vs. an average of 3.5% in the preceding two years.

But the Fed chairman also said that "outside of the housing and motor vehicle sectors, economic activity has, on balance, been expanding at a solid pace," as evinced most notably by the strong labor market.

"A reasonable projection is that economic growth will be modestly below trend in the near term but that, over the course of the coming year, it will return to a rate that is roughly in line with the growth rate of the economy's underlying productive capacity," Bernanke said. "This scenario envisions that consumer spending --supported by rising incomes and the recent decline in energy prices -- will continue to grow near its trend rate, and that the drag on the economy from the motor vehicle and housing sectors will gradually diminish."

Bernanke's modestly optimistic comments about economic growth were accompanied by comments about inflation which "has been somewhat better behaved of late," he said.

"Looking forward, core inflation seems likely to moderate gradually over the next year or so. Some of the factors that pushed up core inflation in the recent past -- in particular, energy prices and shelter costs -- appear likely to be more neutral in the coming year, and inflation expectations remain contained," Bernanke said. However, "the risks to the

inflation forecast seem primarily to the upside."

Major stock averages were recently hovering near break even but fell in initial reaction to Bernanke's comments, which seemed to downplay hopes for a Fed rate cut anytime soon. In fact, the speech could be interpreted as "steady as she goes" approach from the Fed chairman, i.e. the Fed remains "data dependent" with a slight bias toward tightening.

Bernanke's comments followed this morning's report that durable goods orders fell 8.6% in October vs. the prior month, well below consensus estimates of a 5% decline and the largest drop in more than six years. Dragging down the headline number was a 21.7% decline in transportation. Excluding transportation, orders fell 1.7%.

Separately, the National Association of Realtors said 6.24 million existing homes were sold in October, the first uptick since February, vs. a revised figure of 6.21 million for September and a forecast of 6.14 million. Still, the inventory of unsold homes grew to 7.4 months vs. 7.3 in September and 4.9 months a year before. The NAR also said home prices fell 3.5% over the last 12 months.

Finally, the Conference Board said its consumer confidence index fell to 102.9 this month from 105.1 in October. Wall Street had expected the reading to rise to 106.4.