Bernanke Update

Federal Reserve Chairman Bernanke is widely expected to reassure Congress (and the markets) this week that last week's discount rate hike does not signal a tightening of monetary policy. Nor does it signal an imminent Fed funds rate hike. This has been a consistent message from Fed officials. The Fed funds futures and the overnight index swaps are little changed since the discount rate hike. Indeed, the first monthly decline in core CPI report in nearly 30 years, reported before the weekend underscores the absence of the kind of inflation that concerns the Fed. The Fed has often cited inflation expectations as a critical factor in setting policy and here it is interesting to note that the 5-year/5-year forward has fallen from 2.87% at the start of the month to 2.48% the low point at the end of last week. That said, the recent string of economic data illustrates that growth differentials have moved in the US favor.