Feb. 15, 2006 -- Ben Bernanke made his first appearance before Congress as the new chairman of the Federal Reserve System this morning and delivered a prepared statement to the House Committee on Financial Services.
Economists, Fed groupies and the markets were watching the event with intense interest, hoping to glean information that would indicate the future actions of the Fed. They are also looking at Bernanke's testimony for style points. Will he be more plain-spoken than Greenspan (as promised in his confirmation hearing)?
Some highlights from his prepared remarks:
The Fed governors see economic growth at around 3.5 percent in 2006 and between 3 percent and 3.5 percent in 2007. Bernanke agrees with that assessment.
The Fed has reached a relatively neutral rate with its 14 hikes in the last two years. Bernanke says that future rate hikes will be based on inflation and growth data that immediately precedes the meeting. In plain language: During their tightening cycle, which started in June 2004, the governors were shooting for a neutral rate. Now that they have it, they'll raise rates when inflation pressures seem to be creeping up.
The housing market is likely to slow in the coming years. Bernanke says that slower growth in home values may lead to a slowdown in consumers using this home wealth to fund spending and start saving more money. A housing slowdown is a risk to economic growth.
Bernanke also thinks continued increases in energy prices will hurt consumer confidence and could lead to a reduction in spending, something that hasn't happened yet, surprising many economists.
Overall, Bernanke says the economy is in a good place as the consumer and business appear to be spending. The biggest risk he sees is continued Fed rate hikes "overshooting" growth and slowing the economy too much. Rate hikes are not certain at every meeting, but the Fed will likely increase rates in the coming months.
Bernanke was direct and confident in his presentation.
Likely the markets will react favorably as the new Fed chair has turned in a good performance and a right-down-the-middle assessment of the U.S. economy.