Markets & Finance

Ben Bernanke on Recovery and Stress Tests


A sampling of what Wall Street economists and strategists had to say about the Fed chief's May 5 congressional testimony

By BW Staff

After concluding his prepared testimony on the U.S. economy to the Joint Economic Committee of Congress on May 5—in which he indicated a slower-than-usual recovery unfolding later this year—Federal Reserve Chairman Ben Bernanke faced his accustomed grilling from lawmakers on the health of U.S. banks. With the May 7 release of stress tests on 19 major U.S. financial institutions looming, Bernanke declined to provide any specific details, but said he is "satisfied" with the results.

What did Wall Street economists and strategists have to say about Bernanke's appearance and other important topics on May 5? BusinessWeek offers a sampling of their comments:

Action Economics

Bernanke sees signs of bottoming in the housing market, according to his prepared testimony before the JEC. He still expects the economy to turn up later this year, but he added, a relapse in the credit crisis could stall the recovery. The recovery will be only gradual, he warned, with the major risk to the economy coming from the labor market. He believes we are likely to see further "sizable job losses and increased unemployment" in coming months. Business investment also remains "extremely weak."

The Fed chief refused to "pre-disclose" stress test results, but is "satisfied" with the data. He is hopeful that many banks will be able to raise private capital, given their "substantial" earning capacity, although their ability to raise private funds remains to be seen.… On how the Fed will know when it's time to start removing liquidity, he said the Fed will withdraw it in an "appropriate way" and won't "snuff out" the recovery. He reiterated that many of the short-term liquidity measures will reverse themselves as they mature.

Bernanke said the Fed is "focused like a laser" on an exit strategy. The Fed chief sees risk of both inflation and deflation. Asked specifically by Ron Paul what the Fed would do if inflation were running at 10% while the economy remained stagnant, Bernanke sidestepped the question, but said the Fed would act to ensure price stability. At some point, he said, we'd "take away the punch bowl."

Beth Ann Bovino, Standard & Poor's

The Institute for Supply Management's U.S. nonmanufacturing index rose to 43.7 in April, better than the 42 expected and the 40.1 reading in March. This comes after the November reading posted an all-time low of 37.4. The business activity index increased to 45.2 from 44.1 in March, while the employment index improved to 37.0 from 32.3. New orders climbed to 47.0 from 38.8.

Marc Chandler, Brown Brothers Harriman

Three-month dollar Libor fell below 1% [on May 5] for the first time. It had peaked slightly above 4.8% after the collapse of Lehman Brothers [in September 2008]. The Libor-OIS spread [difference between Libor and the overnight index swap rate] also narrowed and at 78 basis points is the lowest in around eight months. The TED spread (yield spread between yield on U.S. T-bills and Eurodollar deposits) also continues to ease. It stands near 81 basis points [on May 5], the lowest since last June.

These metrics reflect the easing of the strains in the financial sector. With more data showing some improvement and officials talking about economic green shoots, there is strong interest in the reflation story.

Edward Yardeni, Yardeni Research

What's next for stocks now that the S&P 500 is back to 907.24, i.e., essentially unchanged for the year? Remember all those terrible problems that knocked the S&P 500 down to the intraday low of 666 on Mar. 6? Well, never mind. The market is up 36% from that low. Is the relief rally over? Not necessarily. What if payroll employment is down "only" 300,000? The S&P 500 could easily jump to the Jan. 6 closing high of the year at 934.70. It might even catapult to 1000 if other economic indicators are also not as bad as they had been.

I doubt that there will be such a happy surprise in [the May 8 release of the April] employment report. But it could happen when May's report is released in early June.

Philip Roth, Miller Tabak

There was little fault to be found in [the stock market's May 4] trading. The major price indexes all went to new highs for the interim recovery, and so did the daily advance/decline lines. Most indexes finished at or very near their highs for the session. Financial stocks, which had been lagging the broader market for a few weeks, caught up with gusto; the S&P 500 Financial Index soared over 10%.

Nevertheless, [the May 4] action notwithstanding—with medium-term momentum indicators beginning to get overbought (for example, the S&P 500 eight-week rate of change is +19.9%) and short-term momentum indicators well below their March peaks (for example, NYSE operating company breadth stands at +4684, compared with +6183 on Mar. 23)—participants should be more concerned with catching the rotation and selective strength, than be expecting big price moves for the broader averages.


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