Fresh clues about how Fed Chairman Ben Bernanke will run the world’s most important central bank came rolling out of his testimony yesterday to Joint Economic Committee in Congress. The excerpt that’s received the most attention from Ben’s talk is this tidbit:
“…at some point in the future the [Federal Open Market] Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook. Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings….”
Ok, so the Fed may stop, then again it might not. No promises. But if does, it might start tightening again later on. Is this the new definition of clarity in central banking? If so, maybe we were better off with the tortured rhetorical acrobatics of Greenspan.
Then again, Bernanke’s performance yesterday was judged a success if you were long stocks. The equity market certainly cheered the idea that rate hikes may take a breather at some point, even if it’s only temporary and less than assured. The S&P 500 yesterday reversed some of the selling from earlier in the week with a healthy bounce. Meanwhile, the yield on the 10-year Treasury slipped a bit yesterday, pulling back under 5.1%.
Bernanke’s comments were still being dissected this morning when the Commerce Department released the advance GDP report for the first quarter, which confirms the healthy economic rebound of recent months that’s been otherwise obvious for some time. The economy expanded by an inflation-adjusted rate of 4.8% in the first months of this year, a sharp rise from the fourth-quarter’s sluggish 1.7% gain. The first-quarter jump was the fastest since 2003’s third explosion of 7.2%.
Helping repair the slippage from the fourth quarter was the sharp rebound in Joe Sixpack’s appetite for durable goods. Joe rushed back into a buying mode and bought $53.5 billion more in cars, refrigerators, etc. in the first three months of 2006 compared with the preceding quarter. That reverses the $52 billion drop in the fourth quarter, and then some.
Overall, personal consumption expenditures–which represent about 70% of GDP–climbed by 5.5% in the first quarter. That’s the biggest quarterly rise since 2003’s third quarter, and a world above the 0.9% blip in the fourth quarter.
The consumer, in case you didn’t notice, is back. Yes, GDP reports are backward-looking documents. But momentum driven by an $8 trillion train (which is roughly what Joe and his counterparts collectively spend each quarter) isn’t easily or quickly derailed.
In fact, we’re inclined to assume that Joe’s reaction to the prospect of stopping interest-rate hikes would be the same as yesterday’s Pavlovian response from the stock and bond markets: buy. Joe doesn’t necessarily need more incentive to do that, but that didn’t stop Bernanke.
© 2006 by James Picerno. All rights reserved.