The equity markets were lackluster today, as Wall Street failed to extend last week's impressive rally in any compelling fashion. Conventional wisdom suggests traders are waiting to hear what Fed Chairman Ben Bernanke says during his address to the Economic Club of New York tonight.
As usual, the tea leaves to be most studiously attended involve any hints about Bernanke's read on inflation and the likely path of future rate hikes. The current sentiment is that one more hike in the Fed Funds rate is assured, two more is pretty likely, and a third is a lesser possibility, before the FOMC pauses. I'm of the mind that the Fed is, if anything, of a less hawkish mind. True, it is a body not immune to oversteering the ship, but I'm getting the feeling that the fairly tame language that's come out of the Federal Reserve during Greenspan's victory lap and since Bernanke took over has not heralded multiple additional cuts with nearly as much certainty as the market seems to believe.
I've been hearing an almost indistinguishable extension of Greenspan's outlook, namely that we're nearing the end of the string of rate hikes, that inflation remains a concern but for now well-contained, and that future moves would have to be data-driven. I don't see any reason to take that language for any less than face value. And the data has by and large suggested that a previously tentative eye on pausing the hikes can now become more assured, as inflation pressures have continued to be mild, particularly at the retail level.
Of course none of this means that anything Bernanke says tonight will better assuage a market that likes nothing better than gleaning spooky subtext where there may be none. But given today's sudden trading ambivalence, I do get the impression that - so long as Ben doesn't drop any bombshells tonight - the markets can probably expect some belated, relief-driven buying come Tuesday.
Watch this space for updates following the address and during tomorrow's trading session.
Update: No big surprises. Bernanke's main messages were that the flat interest rate curve (Greenspan's "conundrum") is indeed quizzical, that economic prospects are good, and that future monetary policy will have to be mindful of a wide range of economic data, rather than tied to a "small set of forecast indicators". I'm thus renewed in my speculation that there will only be one more hike (to 4.75%) in the Fed Funds rate before the Fed pauses (unless something changes). The only possible hawkish subtext to tease out so far as I can see is if Bernanke means to suggest that, despite tame inflationary pressures, there may still be a case for additional hikes when considering a wider range of indicators. But that interpretation would tend to paint Bernanke as more monetarily hawkish than his predecessor, which seems unlikely.
Handcrafted by Flip on March 20, 2006 |
TrackBack URL for this entry:
Listed below are links to weblogs that reference Conjecturing Ben: