Nothing New from Bernanke, Wait for Q&A

The prepared remarks from Bernanke's testimony do not appear to break any new ground. They reflect what has said recently and several times he drives home this point. The prepared statement is peppered with phrases such as "as I have said".

Recently, it has been in response to questions that Bernanke's comments have had the most market impact. The Federal Reserve Chairman tries to drive home the point that Fed's asset purchases are not on a "pre-set course".

He explains the two main policy tools the Fed is using, asset purchases and forward guidance. The role of the former, he says, is to lift the short-term momentum of the economy to absorb the slack in the labor market. The forward guidance is used to help maintain a high degree of accommodation in monetary conditions.

Bernanke seems, if anything, to play up the asymmetrical posture. If the economy improves faster and inflation moves back toward target, the Fed could reduce the pace of purchases quicker. If the labor market looses momentum and inflation does not appear to be moving back toward target, the Fed can maintain the pace of purchases longer.

The dollar has softened in response, bond yields have eased and the equities have moved higher. The short-term market participants are reading Bernanke's comments dovishly. We are concerned that inflation, even if Bernanke is correct and is being partially depressed by transitory factors, is unlikely to rise at the core level much before the Sept FOMC meeting.

Moreover, the recent data, including inventories, consumption (via retail sales) and housing activity, like today's housing starts, permits and mortgage application, point to slower economic activity. The FOMC meeting later this month concludes on the same day Q2 GDP will be released and economists have been revising their forecasts lower (sub-1% is common now). The Beige Book later today will also be scrutinized for signs that the interest rate sensitive sectors are already being impacted by the rise in rates.

As we do not see Bernanke breaking new ground in his prepared remarks, we would not be surprised to see the greenback recover.