Federal Reserve Chairman Ben Bernanke fought off numerous queries from a serious, agenda-filled Senate Banking Committee and sent U.S. equity markets into a steep fall on Wednesday.  Media coverage quickly picked up on Bernanke’s “unusually uncertain” capsulization of the economy and used this phrase to characterize the Fed’s position regarding the strength and direction of the U.S. economy.

Bernanke may have appeared uncertain about the economy’s direction, but he was steadfast in the Fed’s commitment to use all weapons at its disposal to prevent a double dip.  Pressed by Senate members to detail the weapons in the Fed’s arsenal, Bernanke played his cards very close to the vest. 

In essence, the chairman did not outline any possible details summarizing the Fed’s position saying, “We remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.”

Thus far, The Federal Reserve has held the line on near zero interest rates, implemented in December 2008, and on the purchase of troubled mortgage and bonds.  The Fed has spent $1.5 trillion on the products since the recession began.

Despite his direct assertions that an economic downturn was unlikely, Bernanke’s testimony weighed heavily on Wall Street.  The Dow Jones closed down 105 points on Wednesday.  Strong corporate returns have neutralized a series of negative reports concerning employment, manufacturing and housing.

When pressed by the committee, Bernanke stuck to his script.  The chairman said was considering all possibilities but that for the time being the main options remained the purchase of more mortgages and lowering the rate paid to banks to place excess reserves with the Fed.

Senate Republicans would like the Fed to halt the flow of red ink while Democrats favor more stimulus funding to solve unemployment.  Bernanke was cool to both possibilities.

Euro Zone Worries

In his testimony, Bernanke added that problems in the euro zone had unnerved Wall Street and created the uncertainty in investment markets.  Bernanke also cited the slow growth in the employment sector as problematic.

Overnight, the euro zone checked in with surprisingly positive economic news.  A survey from Markit showed improved employment, progress in manufacturing and increased growth in the euro zone.

The Markit Purchasing Manager’s Index surveys 2000 varied businesses in the zone.  The index rose to 56.0 in July, up from 55.5 in June.  Analysts had projected a slight downward turn to 55.0.  Manufacturing rose to a starling 56.5 from 55.6 in June.

The zone’s largest economy, Germany, reported the largest growth in its services sector in three years.  France also reported gains in demand for services.

European markets rose sharply on the release of the Markit survey and carried forward in early morning U.S. trading.

U.S. equity markets closed flat on Monday in the lightest trading day of the year. About 7 billion shares were traded, well below the daily average of 9.65 billion. Along with the central bank’s discount rate hike, several other credit-tightening measures, announced last week, have raised investor concerns about the Federal Reserve’s intentions. However, overnight news that the Senate cooperated in passing a jobs creation bill stirred overnight market activity.

Dennis Calijas of Lind-Waldock in Chicago summed up investor mindset: “People are still trying to figure out what the intentions of Bernanke are, moving forward.” The concern emphasizes how reliant the American economic environment has become on Washington. The Fed’s looser monetary policy brought about significant gains in equity markets in 2009, but indications are a belt tightening is at hand.

As President Obama put forth a revised health care initiative on Monday, the political bickering in Washington continues to weigh on national and global markets. Healthcare stocks rose but the shift away from reform has benefited stockholders.

On Monday the Dow Jones lost 18.97 points, the S&P 500 Index lost 1.16 points and the Nasdaq Composite Index fell 1.84 points. The S&P Energy Index closed up 1.2 percent.

All eyes are focused on Federal Reserve Chairman Ben Bernanke’s testimony before the House and Senate on Wednesday and Thursday. The stakes are high. Investors have enjoyed unusual liquidity and the discount rate hike is viewed as just the first of many credit-tightening measures. Later this week, the U.S. Commerce Department will release the GDP report. If reports show continued growth, investors foresee the belt will tighten further.

Oil Busts Through $80 Barrier

Buoyed by a refinery strike in France, oil broke through the $80 per barrel level and appears headed north.  The announcement that Iran intends to commence construction of 10 new nuclear enrichment plants also influenced pricing. Two of the Iranian plants could start construction later this year.

U.S. crude for March delivery settled at $80.16, a 35-cent increase. The price is the highest front-month contract since January. Monday marked the fifth consecutive gain for U.S. crude, up 8.13% during the span. Monday activity continued the longest winning streak of 2010.

Some of the increase may be due to expected travel increases in upcoming months, but the biggest factor is clearly the lack of production from France. Approximately half of the country’s refining capacity has halted. Only one million barrels per day are in production. French motorists swarmed retail outlets. The repercussions from the strike will take a heavy toll on supply by the end of the week.

The world’s second largest oil consumer, China, reported increased demand in January. The country processed 30.14 million tons of crude in the month, an increase of 29% from a year ago. The dollar gained strength but the mitigating circumstances outweighed the currency increase.

“Markets are set to remain volatile in the week ahead due to the line-up of economic data and in particular Friday’s GDP reading as players look for signs of continued growth as the Fed begins to reign in its emergency measures” declared James Moore of the BullionDesk.com.

$15 Billion Jobs Bill Gets Senate Nod

In a surprising overnight move, 5 Republicans, and 2 independents joined 55 Senate Democrats in support of a modest $15 billion jobs creation bill aimed at cutting taxes and stepping up highway spending.  Rebuilding the country’s infrastructure is viewed as a worthwhile means to trim unemployment.

The key initiatives in the bill include:

• A tax credit for businesses that hire unemployed workers.
• Subsidies for state and local construction bonds
• Money to shore up a highway-construction fund
• Provisions to reform offshore tax shelters.

The bill is expected to add or save 1.3 million jobs. The bill, although a small step forward, signals a possible change in the political climate in Washington. The President has called for a spirit of cooperation and while that may not happen with health care, improving upon the 20% underemployed rate in the country will ease some of the economic pressure.

Legislation authorizing $155 billion in job creation spending passed the House in December. The passage of this smaller bill is seen as the first of many similar remedies. All ongoing legislation will require more bi-lateral cooperation between members of the Senate. The parties continue to ignore the public outrage with Washington’s handling of the recession.

In his report last week, Federal Reserve Chairman Ben Bernanke signaled upcoming interest rate hikes. However, national and international markets appeared caught off guard with the Federal Reserve’s announcement of a discount rate increase of 0.25% to 0.5%. The announcement was followed by swift shifts in global currency, commodity and equity markets.

The dollar was lifted as U.S. Treasury bond prices slipped and equity markets shrunk upon the central bank’s release. Members of the Federal Reserve rallied to support the move and to assure financial markets that the rate hike did not represent a change in Bernanke’s previously stated monetary policy.

New York Fed President William Dudley called the move a technical change that carried no further message to the marketplace. Dudley stridently affirmed that the discount rate increase did not represent a tightening of U.S. monetary.

The Federal Reserve’s fund rate, the cost of overnight interbank borrowing, remains at the historically low near-zero rate.  The Federal Reserve discount rate hike was announced after the stock market closed on Thursday. The central bank’s next meeting is March 16^th.

Dudley’s remarks were echoed by Dennis Lockhart of the Atlanta Federal Bank and James Bullard of the St. Louis Federal Reserve Bank. In efforts to calm markets, the message that “this stance is necessary to support a recovery that is in an early stage and very fragile” was repeated at various venues across the country.

Nervous Markets React

The late Thursday hike was the Fed’s first increase since the recession began in 2007. Stock markets balked at the move. Apparently caught off guard by the timing of the release, investors worried that further hikes were on the way.

Last year, U.S. equity markets used the easy money policy of the Fed to mount a stirring rally.  Robert Rennie of Westpac in Sydney seemed to capture market sentiment. “The emergency easing cycle began with discount rate cuts. It was all about easing the liquidity to banks. So, the move to raise the discount rate means the long journey toward normalization has begun.”

Prior to the recession, the Federal Reserve’s discount rate was a full percentage point higher than the federal funds rate. The rates are now about 0.5% apart.

As other international central banks have begun to raise rates, the U.S. has justified its low rate stance by pointing to the country’s unemployment crisis.

In another move announced Thursday, the Fed changed the maturity of primary credit loans to overnight. The change will take place on March 18. The previous maturity date was 28 days.

The Federal Reserve Contemplates Other Action

Investors view the shift as the first of several future moves by the Federal Reserve. The central bank has several monetary tightening measures that are expected in the future.

Interest on Excess Reserves – By raising what the Fed pays banks  for excess reserves, banks are encouraged to build and sustain cash reserves.

Reverse Repossessions – The Federal Reserve has discussed using mortgage-backed securities as collateral to subsidize reverse repossessions. In this scenario, the Fed sells assets with an agreement to repurchase the assets at a later date.

Create a New Term Deposit Facility – Just as the Fed pays interest to banks on excess reserves, the central bank is considering making favorable interest rates available for longer terms. This could decrease the supply of money the banks have to lend to each other.

Sale of Assets – Bernanke has said that any asset sales would be gradual, but the Fed’s balance sheet is overloaded.  Other members of the central bank have taken a more aggressive posture on the possible sale of these assets.

In his report last week, Federal Reserve Chairman Ben Bernanke signaled upcoming interest rate hikes.  However, national and international markets appeared caught off guard with the Federal Reserve’s announcement of a discount rate increase of 0.25% to 0.5%.  The announcement was followed by swift shifts in global currency, commodity and equity markets.

The dollar was lifted as U.S. Treasury bond prices slipped and equity markets shrunk upon the central bank’s release.  Members of the Federal Reserve rallied to support the move and to assure financial markets that the rate hike did not represent a change in Bernanke’s previously stated monetary policy. 

New York Fed President William Dudley called the move a technical change that carried no further message to the marketplace.  Dudley stridently affirmed that the discount rate increase did not represent a tightening of U.S. monetary.

The Federal Reserve’s fund rate, the cost of overnight interbank borrowing, remains at the historically low near-zero rate.  The Federal Reserve discount rate hike was announced after the stock market closed on Thursday.  The central bank’s next meeting is March 16^th. 

Dudley’s remarks were echoed by Dennis Lockhart of the Atlanta Federal Bank and James Bullard of the St. Louis Federal Reserve Bank.  In efforts to calm markets, the message that “this stance is necessary to support a recovery that is in an early stage and very fragile” was repeated at various venues across the country.

Nervous Markets React

The late Thursday hike was the Fed’s first increase since the recession began in 2007.  Stock markets balked at the move.  Apparently caught off guard by the timing of the release, investors worried that further hikes were on the way.

Last year, U.S. equity markets used the easy money policy of the Fed to mount a stirring rally.  Robert Rennie of Westpac in Sydney seemed to capture market sentiment. “The emergency easing cycle began with discount rate cuts.  It was all about easing the liquidity to banks.  So, the move to raise the discount rate means the long journey toward normalization has begun.” 

Prior to the recession, the Federal Reserve’s discount rate was a full percentage point higher than the federal funds rate.  The rates are now about 0.5% apart. 

As other international central banks have begun to raise rates, the U.S. has justified its low rate stance by pointing to the country’s unemployment crisis. 

In another move announced Thursday, the Fed changed the maturity of primary credit loans to overnight.  The change will take place on March 18.  The previous maturity date was 28 days.

The Federal Reserve Contemplates Other Action

Investors view the shift as the first of several future moves by the Federal Reserve. The central bank has several monetary tightening measures that are expected in the future. 

·                     Interest on Excess Reserves – By raising what the Fed pays       banks  for excess reserves, banks are encouraged to build and sustain cash reserves. 

·                     Reverse Repossessions – The Federal Reserve has discussed using mortgage-backed securities as collateral to subsidize reverse repossessions.  In this scenario, the Fed sells assets with an agreement to repurchase the assets at a later date. 

·                     Create a New Term Deposit Facility – Just as the Fed pays interest to banks on excess reserves, the central bank is considering making favorable interest rates available for longer terms.  This could decrease the supply of money the banks have to lend to each other. 

·                     Sale of Assets – Bernanke has said that any asset sales would be gradual, but the Fed’s balance sheet is overloaded.  Other members of the central bank have taken a more aggressive posture on the possible sale of these assets.

In relatively unscheduled fashion, President Barack Obama announced his nomination for the next Federal Reserve Chairman: Ben Bernanke. Praising Bernanke for “preventing” a repeat of the Great Depression, Obama also noted that the current Fed Chief exhibited “calm and wisdom” when bringing the economy back from the brink. A no-brainer of a decision, the announcement actually caught some in the market by surprise as an actual nomination wasn’t expected to arrive till later in the third quarter. Moreover, a different front runner was expected to assume the role as Monetary Chief, Director of the National Economic Council Larry Summers. As a result, speculation surfaced over the timing and release of Bernanke’s second term nod. Incidentally, the 9 am press conference was prior to the stock market open of 9:30 am and the even more important release of the pessimistic report by the Congressional Budget Office. Simply put, was the President boxed into appeasing the market considering the massively detrimental report following the Massachusetts based announcement? Nonetheless, more surprises may be on the horizon as two more nominations are expected for the newly revamped Federal Reserve.

US consumer confidence rose more than anticipated for the month of August as fears over unemployment and economic turmoil slowly abated. According to the Conference Board, confidence ratcheted higher to a 54.1 print from a previously revised score of 47.4 in the month of July. Interestingly, the better than expected results were boosted by an optimistic assessment of the current economic situation. Most respondents saw job market recovery in the near future helping to support the component. Even more notable, the expectations index witnessed a sharp recovery, jumping to a level not seen in almost two years. As a result, the report could bode well for the world’s largest economy, with expectations that the current good vibes may translate into bottom line consumption. The report helped to boost the US dollar throughout the session, making notable gains against the Euro, British Pound and Canadian dollar.