Bullard ahead of Bernanke

Much attention will be given the Federal Reserve Chairman Bernanke's mid-week testimony before the House Finance Committee. He is expected to provide more details about the Fed's exit strategy.

Atlanta Fed President Bullard is quoted on a news wire that might be anticipating Bernanke's testimony. First in terms of the economy itself, Bullard expected H1 2010 growth to be above 3%. This is a bit above the street. The Bloomberg concensus is for about 2.75% growth in H1 and 2.85% in H2.

He opines that a double dip recession is not very likely. While we agree, we have become increasingly concerned about the contraction in bank lending in the US--cited in the last FOMC statement, the collapse of money supply in Europe and the biggest decline in Japanese bank lending in 4 years (reported earlier today).

Bollard also seemed relatively optimistic in suggesting that the unemployment rate may have already peaked, though he did acknowledged the recent rise in weekly initial claims as a cause of concern.

In terms of the exit strategy, Bollard favors asset sales before hiking rates. He suggests that the asset sales could begin in the second half.

He does not anticipate the Fed extending its MBS purchases past March. In this context it is interesting to note that although the Fed's plans to complete the MBS purchases is widely known, the backing up of rates has not taken place, at least thus far.

Along these lines, US Treasuries, which one might expect to be weighed down by supply and the absence of a large buyer (the Fed), have also performed admirably in the first part of Q1 10, with the 2-year yield off 35 bp and the 10-year yield off 25 bp. Most of this decline may reflect an adjustment to real yields as inflation expectations have eased slightly--about 10 bp on the 5 year/5-year forward metric.