U.S. indices held positive as the Fed chairman presented the semiannual monetary policy report, which reiterated that the weak job market and subdued inflation justify keeping interest rates low for "an extended period."
Doug Roberts, chief investment strategist for ChannelCapitalResearch.com, said there was maybe a 10% chance that there would have been a change to the "extended period" language in Wednesday's testimony and that any expectation in the market for such a change was prompted by the somewhat odd timing of last week's discount rate hike.
"The timing of the discount rate change was surprising because it didn't come during a Fed meeting -- even though the minutes basically laid out that is what they were going to do just that -- so you may have had some people wondering whether it was laying the groundwork for something else," Roberts said. He added that Bernanke's comments today reassured that the change in the discount rate isn't related to any expected changes in the federal funds rate.
semiannual report painted a picture of an economy that appears to be sustaining economic expansion through improved financial conditions, global economic recovery and accommodative monetary and fiscal policies.
Weakness in the labor market, however, continues to cloud the economic outlook.
Ben Bernanke, chairman of the Federal Reserve
According to the report, participants expect expansion to GDP that's only slightly above its longer-run sustainable growth rate and an unemployment rate that will decline only slowly over the next few years.
Bernanke's testimony pointed to the potential weakness that recent economic growth could be temporary because much of it arose from companies working down unwanted inventory.
As such, the Fed chairman said the FOMC continues to expect economic conditions "to warrant exceptionally low levels of the federal funds rate for an extended period," pointing to low resource utilization rates, subdued inflation trends and stable inflation expectations.
Bernanke also reiterated that the Fed will begin unwinding accommodative policies when the health of the economy warrants tightening.
"Although the federal funds rate is likely to remain exceptionally low for an extended period, as the expansion matures, the Federal Reserve will at some point need to be begin to tighten monetary conditions to prevent the development of inflationary pressures," Bernanke said, adding, "We are confident that we have the tools we need to firm the stance of monetary policy at the appropriate time."
In the question-and-answer session following his testimony, Bernanke advised a closer look at the trajectory of the deficit and urged the development of a solid plan to reduce the deficit because bond markets could begin to worry about sustainability.
Bernanke said that establishing a solid plan to lower medium- and long-term deficits will provide flexibility to take other actions that might be needed in the short term.
Bernanke presents the report to the Senate Committee on Banking, Housing and Urban Affairs on Thursday.
ChannelCapitalResearch.com's Roberts expects Thursday's testimony to yield questions that are more probing on policy issues.
"In the House, it's a different atmosphere than the Senate -- it tends to be more partisan. They have elections every two years so there may have been more political posturing than you're likely to see in the Senate," Roberts said.
Written by Melinda Peer in New York