Testimony
A growing chorus of Fed officials have spoken in the last week and stated that the overnight rate ain’t going up any time soon. It’s getting loud enough that it is difficult to ignore. In the last week we’ve heard this sentiment from the following Fed officials:
- St. Louis Fed President James Bullard
- San Francisco Fed President Janet Yellen
- New York Fed President William Dudley
- FOMC Chairman Ben Bernanke
This morning Bernanke testified before the House Financial Services Committee that low levels of resource utilization and stable inflation expectations are combining to create a need for exceptionally low Fed Funds levels for an extended period of time.
Additional factors cited were:
- Weak job market
- Unemployment rate near 10%
- 40% of unemployed have been without a job for 6 months or more
- Job openings are scarce
Jobs
As he has done in his prior writings, Bernanke is stressing that job creation involves the extension of credit to small businesses. He is going to work with banks to ensure that they are giving small businesses a “second look” when it comes to lending.
More than one question in this morning’s testimony was directed toward bank lending and job creation. At every opportunity Bernanke stressed that the Fed is working with the banks that they supervise to insure that small businesses can get access to credit.
The peanut gallery
The entertainment value of watching these sessions is priceless. If the testimony were turned into a movie I wouldn’t know if I would place it in the “Comedy” genre or the “Horror film” genre. It’s kind of a hybrid.
For instance, when it was Ron Paul’s turn to ask a question of Bernanke he went on a long and rambling diatribe where he accused the Fed of a wide range of activities; from funding the 1972 Watergate break in to perhaps propping up the country of Greece. When he was finished the camera flashed to Bernanke for his response. The Chairman looked off into the distance for a moment, mouth slightly agape, as if searching for just the right words. When he spoke he said “Congressman, the specific allegations that you’ve made are absolutely bizarre” and “I have no knowledge of anything remotely like what you’ve just described.”
It reminded us of the scene from Adam Sandler’s movie “Billy Madison” where the following exchange takes place following Sandler’s answer to a debate question:
Principal: Mr. Madison, what you've just said is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.
Billy Madison: Okay, a simple "wrong" would've done just fine.
From the scary movie aisle comes Maxine Waters’ turn at the microphone. This might win the train wreck of the day award. Congressman Waters statement began well enough…we all thought for a moment that she was going to stumble into a good question…and then right when we thought she was gonna lay it down…it all came off the tracks.
It became frighteningly obvious that Senator Waters not only doesn’t understand the difference between the Discount Rate and the Fed Funds rate…but she is incapable of understanding it even when the Fed Chairman himself is explaining it to her.
She was adamant in her belief that raising the discount rate would cause an immediate upward shift in ARM rates. Even after Bernanke explained to her that there is no linkage between the Discount Rate and ARM rates she didn’t give up. She pressed him for a guarantee that it wouldn’t happen. It’s a bit like a depositor thinking you’re going to move the location of the drive-through window if they get a new car.
She simply could not get past the fact that there was no logical basis for her question. Despite Bernanke’s best efforts to straighten it out and get her an answer to a question that actually made sense, she clung to her initial inquiry as if she could turn it into a “gotcha” type moment. It is both funny and sad to me that the Fed Chairman has to testify to a room partially filled with people that have no hope of even understanding the problems we face…much less be able to provide answers to them.
There are some good questions, but just when you feel like there is some hope and that the conversation is moving in the right direction, another doozey comes out.
I’m frequently surprised by how far my little Market Update gets distributed. I know that a few people on the list are only one “forward” away from the Chairman. So Bernanke…if you read this…I’ll buy you a beer next time you’re in town. I don’t know how you sit in front of that panel and answer every question with such professional bearing.
The Big Picture
The overall tone of the testimony was that things are tough, they will stay tough for a while, the overnight rate has no reason to go up any time soon, and that we can’t sustain long term federal deficits that are several times our annual GDP. There are more voices clamoring for fiscal restraint recently but it doesn’t have a feel that anyone is remotely close to reigning in spending.
The Market
The bond market is unchanged on the short end and up a bit from the 10 year out. The 10-year is currently trading at a 3.66%.
If you have any questions or if there is anything I can do just let me know.
Steve Scaramastro, SVP
800-311-0707
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