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Experts Talk Bernanke Testimony, 'Dreadful' Home Sales

By Bloomberg BusinessWeek Staff

Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Feb. 23.

Joseph Lavorgna, Deutsche Bank

[Federal Reserve Chairman Ben] Bernanke's testimony before the House Financial Services Committee was largely as we expected—cautiously optimistic. The Chairman noted the ongoing improvement in financial conditions, as well as stronger economic output and signs of recovery in the labor market. While he tempered some of the recent growth figures by acknowledging the short-lived impact from inventories and Federal stimulus spending, he also noted, "Private final demand does seem to be growing at a moderate pace," due to consumer spending, business investment and stronger exports. The Chairman appeared to remain confident that inflation would remain subdued for some time as a result of slack in the economy, particularly in the labor market. On that note, he reiterated that the job market "remains quite weak."

In terms of the monetary policy outlook, Bernanke repeated that the exceptionally low level of the federal funds rate is warranted for "an extended period." Some analysts interpreted the Fed's recent discount rate increase as evidence that the extended period language would be dropped from the FOMC statement in March, but with Mr. Bernanke using this specific language again this morning, we expect it to remain in the Fed statement a bit longer. We expect it to be dropped in the May statement, assuming that the labor market improves along the profile we are projecting. Similar to the testimony he delivered on Feb. 10, the Chairman again cautioned that the Fed will "at some point need to begin to tighten monetary conditions," but he gave little indication of when this would ultimately be.

We continue to expect the first Fed tightening to occur at the August [Federal Open Market Committee meeting]—the July Humphrey-Hawkins testimony could provide the platform for the Chairman to prepare the markets for such a move.

David Greenlaw, Morgan Stanley

Bernanke offered a cautiously upbeat assessment of the economic outlook but few new clues regarding the future course of Fed policy. He reiterated the FOMC's message that "the federal funds rate is likely to remain exceptionally low for an extended period." However, he also indicated that "at some point" the Fed will "need to begin to tighten monetary conditions to prevent the development of inflationary pressures."

We continue to believe that a sustained economic recovery will lead to a rise in market-based measures of inflation expectations and this will push the FOMC toward the exit door during the second half of the year. And, the more dovish the Fed's message, the more the market will want to test the Fed's inflation fighting credibility. For now though, the message is that improved financial market conditions are leading the Fed to unwind the special liquidity support facilities that had been put in place but that these actions do not necessarily carry a broader policy signal.

Anna Piretti, BNP Paribas

U.S. new home sales plunged by 11.2% month-over-month in January to 309,000 annualized units, falling well below a previous historical low of 329,000 reached at the beginning of 2009. After showing some signs of life in the spring of 2009, new home sales steadily worsened over the second half of last year, dropping five times over the past six months. The dreadful January report appears somewhat at odds with the recent mild improvement recorded by the National Association of Home Builders Housing Market Index, suggesting the minor firming in sentiment did not translate into a pickup in the hard data.

In January, weakness was widespread across most of the country, with sales increasing only in the Midwest (+2.1% month-over-month). Elsewhere, sales plummeted by 35.1% in the Northeast and fell by 11.9% in the West and by 9.5% in the South. Adverse winter conditions likely played a role, dissuading prospective buyers from visiting building sites. In this respect, the heavy snow storms that pummelled the East Coast in February suggest further weakness is likely next month.

The stock of homes available for sales was virtually unchanged in January, inching up 0.4% m/m, but the sharp decline in demand pushed the month-supply of inventories up to 9.1 months from 8.0 previously. After steadily declining for most of last year, this measure has been worsening for the past three consecutive months, in line with the recent deterioration of demand.

While the government's home buyer tax credit appears to have benefited sales of existing properties, the newly built home market continues to suffer as builders struggle to compete with fire sale prices and the high level of foreclosures.

Gary Bigg, Bank of America Merrill Lynch

Mortgage applications have now fallen for three consecutive weeks. After declining 1.2% and 2.1% in the prior two weeks, mortgage loan applications dropped 8.5% for the week ended Feb. 19. No doubt [major February snowstorms] had an adverse impact on applications. Applications for refinancing fell 8.9% in the latest week. Purchase applications have now fallen for three consecutive weeks. After posting declines of 7.0% and 4.0% in the prior two weeks, mortgage applications for purchase tumbled 7.3% in the latest week.

The index for purchase applications has now fallen to 1997 levels. The contract rate for a 30-year fixed rate mortgage rose 9 basis points to 5.03%.

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