Do You Hear What I Hear?
Despite the nuanced, even-handed tone of U.S Federal Reserve chief Ben Bernanke's speech on the outlook for the economy on Wednesday, the markets took it as assurance that the Fed is done--or nearly done--with its rate-tightening.
In prepared remarks he delivered to the Senate Banking Committee, Bernanke said that economic growth was showing signs of slowing and predicted, therefore, that inflation would moderate. He also acknowledged the risk that the Fed could go too far with its tightening.
But at the same time, he dwelt in his testimony on the causes of inflation and insisted in response to a Senator's question that a rise in inflation--along with the risk that global turmoil might cause energy prices to climb yet higher--were the two biggest threats to the economy.
Surprisingly, investors seemed to tune out Bernanke's comments on inflation risks. Stocks staged their biggest rally in three weeks, and bond yields fell.