What to Expect from Bernanke Today

Federal Reserve Chairman Bernanke will speak about the economy in NYC at lunch today. There are a few points that the market will be closely watching.

1. He is likely to reiterate the general thrust of the recent FOMC statements. The economy is recovering, but it remains fragile and price pressures remain well contained. The Fed is in no hurry to raise rates.

2. The last FOMC statement underscored three conditions the Fed is monitoring for adjust monetary policy: capacity utilization rates, which includes unemployment, inflation expectations and current price pressures. While there has been a small tick up in inflation expectations, measured by the Univ of Michigan consumer confidence survey, 5-year/5-year forward, and break even on TIPS. However, these readings remain largely confined to the recent ranges.

3. Notable for their absence from the Fed's inflation watch were gold prices and the dollar's performance. This dovetails well with our understanding of the Fed's position. While we do not think that a weakening dollar is a policy objective of the Fed's, we do recognize that its decline has come at a fairly low cost to it in terms of interest rate and/or inflation pressure and that it does not contradict the extraordinary monetary policy stance.

4. That said, in recent weeks, some Fed officials, including Bernanke have appeared to talk the dollar up without being prompted to do from reporters. It would not be surprising if Bernanke said something to the effect of the strong dollar being a desired goal of US policy. Separately, our contacts in Washington suggest that while the US will not lead the move, if there was a request to intervene to support the dollar, the US would not reject it out of hand.

5. Bernanke may reiterate the general outline of the Fed's exit strategy, the tools that it has at its disposal and its commitment to use them in a timely fashion, without breaking new ground. A recent staff paper underscored the importance of paying interest on excess reserves as being an important innovation that will help prevent the potential inflationary threat.