It’s a busy day of hearings on Capitol Hill
There hasn’t been this much buzz since the “Three Tenors” – Detroit’s embattled auto execs – dropped by for a drubbing last year.
In one room, a contrite Akio Toyota will try to mollify lawmakers about his legendary company’s safety slip-ups. The trick for the panel of inquiry is to make him squirm without appearing to be cheerleaders for G.M.
Occupying the hot seat in another hearing room will be the economy’s answer to the Cheshire Cat, Fed Chairman Ben Bernanke. Bernanke will be appearing for his semi-annual report to the House Financial Services Committee.
Both hearings are hot-ticket items.
Only one session matters. All eyes and ears from Wall Street to Main Street will be focused on the bearded, professorial-looking Bernanke.
Everyone wants to know, will he or won’t he raise interest rates, and when.
The answer is easy. Not now.
Even though the Federal Open Market Committee (FOMC) hiked the discount rate charged to banks by the Fed for emergency overnight loans last week by one quarter of a point, Bernanke assured the hearing panel he will maintain the status quo for the next several months.
Much as Bernanke is concerned about the build-up of inflationary pressures and is looking for an exit from the extraordinary measures implemented by the Fed to spur the economic recovery, he knows he has to stand pat.
He Will Hold Steady
So long as the employment market remains slack with joblessness still hovering near 10 percent and the demand for consumer goods continues to be soft, Bernanke will do nothing to rock the boat. While inflation may be a concern for the Fed Chair, it remains well below his event horizon.
In a prepared statement to the Committee, Bernanke told the panel, “The FOMC continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
The shorthand version: He believes he will have to continue pumping money into the economy to keep the embryonic recovery on track.
Today’s figures showing that new home sales for January fell to their lowest level on record is a convincing backdrop for Bernanke’s decision to stay the course. This fall-off in home sales is also a sign that a government extension of the $8,000 tax credit for first-time homebuyers may not be enough to rekindle demand.
Like the President, Bernanke’s most nagging concern is not inflation, but rather unemployment. In his testimony, the Fed Chair, who has just been reconfirmed for another four-year term, lamented the scarcity of new job openings being produced by the economy.
Bernanke and lawmakers are at an economic crossroads.
The Unemployment Goal
They want to ensure a durable expansion that will start generating enough jobs to bring down the unemployment rate to a steady 9.7 percent by year’s end. At the same time, they hope to convince investors they can start withdrawing the near $1.1 trillion they have put into play in time to stave-off inflation.
To complicate matters, over the past year, the Fed has expanded its balance sheet to $2.28 trillion in an attempt to provide supplementary credit to the economy. The central bankers are also just completing a $1.43 trillion purchase of mortgage-backed securities in an effort to bring more liquidity to the already tight home lending market.
Bernanke told the Committee that while conditions in the financial markets are improving, bank lending continues to be tight. In spite of all the money sloshing around and available to the banks, Bernanke expressed frustration that lending, especially to the entrepreneurial sector, where the majority of new jobs will be created, has been virtually non-existent.
Apparently, the market likes what Bernanke had to say. After getting hammered yesterday, stock indices across the board are up.
It seems that everyone likes free money. If we are to take Bernanke at his word, for the next several months, the Fed will continue to be every banker’s favorite candy shop.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
