Fed Chairman Ben Bernanke's testimony before Congress was more or less what everyone had expected. The Chairman called for sustained economic growth and for inflationary pressures to alleviate somewhat; in other words, there is not going to be any change interest rates for the foreseeable future.
Bernanke predicted that real GDP would expand at a pace of 2.25% - 2.50% this year and slightly faster next year. His forecast was .25% lower than what he said in February because of the slowdown in housing. Bernanke believes that increased personal consumption and higher business fixed investment will drive overall economic growth.
On the inflation front, he anticipates core PCE inflation to run at 2.0% to 2.25% this year and 1.75% to 2.0% in 2008. He acknowledged risks to this forecasts, particularly energy prices, which could run higher.
A sizable amount of Bernanke's testimony was devoted to housing. He predicted that home sales would remain sluggish. He also discussed the possibility of requiring new disclosures from mortgage lenders that would highlight rates, fees and penalties that might be imposed. In addition, the new rules would provide 45 days notice of a rate increase.
It is hard to get excited about Bernanke's testimony. There were no surprises. On the other hand, Bernanke has been calling things as he sees them and this is good. The economy is in a relative sweet spot, but risks do exist.
For investors, Bernanke's testimony did not provide any new trading opportunities. Energy prices could appreciate even more, a positive for companies such as ExxonMobil (XOM) and W-H Energy (WHQ). Housing remains a sector to avoid, a negative for companies such as Builder's FirstSource (BLDR).
I should also point out that it is somewhat ironic that Bernanke's commentary came out on the same day that J.P. Morgan (JPM) released earnings because of the similarities between the speech and the quarterly report. Bernanke acknowledged worldwide economic growth and the problems within the housing sector. JPM benefited from strength in the international financial markets, but also raised the credit-loss provision for its Chase unit from $100 million to $587 million because of problems in the subprime market.
Read the analyst report on Exxon Mobil
Read the analyst report on W-H Energy
Read the analyst report on Builder's FirstSource
View the snapshot report on J.P. Morgan
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