Reuters: Bernanke: full effect of rate cuts yet to be felt

by Alister Bull

(Reuters) The full benefit of recent Federal Reserve interest rate cuts has not yet been felt, Fed Chairman Ben Bernanke said Thursday, nodding to a policy lag that may reduce the need for many more rate moves ahead.

Ben Bernanke

CNBC.com

Ben Bernanke


“Further actions will have to depend on how the economy evolves and we are looking of course at both sides of our mandate, growth and inflation,” Bernanke told a U.S. Senate Banking Committee hearing on the rescue of troubled investment bank Bear Stearns.

“The effects of monetary policy are felt over a period of time and we expect to see further positive effects of these policies going forward,” he said.

“I believe we have helped to offset the credit crunch to some extent.” Bernanke acknowledged in testimony Wednesday that there was a risk U.S. growth could contract slightly in the first half of this year, before picking up in the next six months.

On the other hand, recent economic indicators have been mixed, with some signaling that conditions were not getting worse at an accelerating pace and may even be stabilizing.

First time he’s used this kind of language.

Bernanke also stressed Thursday that the Fed was uncomfortable with the current high levels of inflation, while arguing that these pressures should abate in the months ahead.

“The primary reason for the high inflation is rapid increases in the price of globally traded commodities, including crude oil and food,” he said.

Headline U.S. consumer prices rose 4.0 percent in February versus a year ago.

“It is our expectation, which is consistent with the prices seen in futures markets, that these prices will moderate in the coming year and that therefore, overall inflation will tend to slow,” Bernanke said.

“However, we are aware of the uncertainties involved with that and we are obviously going to be watching the situation very carefully,” he added.

2008-04-03 US Economic Releases

2008-04-03 Initial Jobless Claims

Initial Jobless Claims (Mar 29)

Survey 366K
Actual 407K
Prior 366K
Revised 369K

2008-04-03 Continuing Claims

Continuing Claims (Mar 22)

Survey 2860K
Actual 2937K
Prior 2845K
Revised 2840K

This is now more in line with what’s looked like near zero growth for the first quarter, and not much more is expected for Q2.

While fear of systemic risk has been reduced with the realization that the Fed/Tsy can -and probably will- simply ‘write checks’ as needed, that doesn’t guarantee general weakness won’t continue.

As Karim has been indicating, we may be near the end of rate cuts, but continued weakness could mean rates stay down for a ‘considerable period.’

Also note markets aren’t (yet) moving much on this.

With reduced systemic risk fears, these types of numbers are more ‘rear view mirror’ events than forward looking regarding the future of GDP growth.

In other words, data can be forward looking for some purposes, like systemic risk, and rear view mirror for other purposes, like GDP growth.

Also, Bernanke pointed to differences between now and the 1930’s, leaving out the largest factor – the gold standard. With a fixed exchange rate policy the govt can’t ‘simply write checks’ as that tends to result in outflows of gold/spikes in interest rates that can quickly lead to default/devaluation.

(The US shut down in the payments system in 1934 and reopened with a domestically suspended gold standard and federal deposit insurance.)

From Karim:

  • Initial claims spike from 369k to 407k; a labor department spokesman said that more claims were processed last week due to good Friday holiday the week before

  • So that means that the rate of change is exaggerated, but not the level (prior week should have been more than 369k

  • Continuing claims (which come out with a 1 week lag) rose from 2840k to 2937k; if to follow the same pattern as continuing claims, should rise again next week

  • Employment component of last non-mfg ISM will be important in shaping final estimates for payrolls tomorrow; right now looks to be about flat

2008-04-03 ISM Non-Manf. Composite

ISM Non-Manf. Composite (Mar)

Survey 48.5
Actual 49.6
Prior 49.3
Revised n/a


Nice bounce off the bottom though longer term still drifting lower.


2008-04-03 ISM TABLE

2008-04-03 ISM TABLE

ISM TABLE (Mar)

From Karim:

Consolidating at contraction levels; employment unch at 46.9;

Yes, bodes for flat Q1 and probably a slow start to Q2.

inventory
sentiment remains poor (inventories too high)

Yes, meaning they are running relatively lean for a recession.

Also, new orders up some export orders up very sharply to 55, indicating continuing weakness for domestic demand but exports picking up the slack and then some.

Prices paid up and too high as well.

Weakness and higher prices continues.

(Crude now up on the day.)