May 22 2012 - Hawkish Forecasts, Dovish Bernanke Comments Leave Markets at Square One Following Busy Fed Day

Highlights from Fed Chairman Ben Bernanke Conference Call

-- Asked if he is being too cautious: Mr. Bernanke said the committee has been 'bold and aggressive' to date and that it is prepared to do more of what is needed to keep on target. He noted that they will continue to access risk and will look at unemployment progress and inflation remaining 'close to target'. He emphasized that they were 'entirely prepared to take additional actions'.

-- Mr. Bernanke was asked about his views now vs 15 years ago when he criticized the Bank of Japan for inactivity: He stated that the views expressed fifteen years ago on Bank of Japan have been consistent. Mr. Bernanke said at that time he said a central bank should avoid deflation and that once a rate hits zero there are still tools available for accommodation. He noted that right now we are not in deflation so have no needed tools to offset this. Noted the Fed has continued to use extraordinary tools. The key difference between now and Japan is that Japan was in deflation and demanded additional actions.

-- Asked about Sheila Bair bond bubble article: He said it is premature to declare victory as Ms. Bair suggested; says keeping rate low remains a priority. He also noted rates also lower due to lack of inflation and safe haven status.

-- Asked about the impact of mild winter on jobs?: He said it reflects the difficulty in forecasting these figures. Mr. Bernanke noted he is not drawing too much of a conclusion from the March report. He said we could see nonfarm payroll sliding back below the 250K area. Noted that, if there appears to be a relapse in Unemployment, then that could drive the Fed to take action.

-- Says in January markets were calmer thanks in large part to steps taken by the ECB. He noted we saw market stress in recent weeks and thus volatility over here. The Fed is taking note that 'a portion' of the improvement has been reversed. Noted he met with European colleagues over the weekend at the IMF meetings; says true Europeans have made substantial progress; expect them to continue to follow through commitments but does see significant problems still remains.

Notable Differences in FOMC  

 -- April 25: Despite some signs of improvement, the housing sector remains depressed... March 13: The housing sector remains depressed...

-- April 25: Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline... March 13: Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately....

-- April 25: The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually... Mar 13: The Committee expects moderate economic growth over coming quarters...

-- April 25: Strains in global financial markets continue to pose significant downside risks to the economic outlook... Mar 13: Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook.

Changes to Monetary Policy Outlook

The Fed provides an outlook on the expectations of rates for 2012, 2013, 2014 and the Long Run. In it, the Fed provides a dot representing the rate each member expects in a given year. We took the cumulative and divided by the 17 members in order to create a 'cumulative average'. The would provide a general overall collective in terms of policy rate expectations.

The average rate expectations at year end as of today: FY12: 0.37%; FY13: 0.60%; FY14: 1.32%; Longer run: ~4.2%  The average rate expectations at year end from the January meeting: FY12: 0.35%; FY13: 0.56%, FY14: 1.12%; Longer run: ~4.2%