KEY POINTS: * Even as the Federal Reserve continues prudent planning for the ultimate withdrawal of monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain, he said in testimony prepared for delivery to the Senate Banking Committee. * 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. * Bernanke, delivering the Fed's semiannual report to Congress on monetary policy, said policymakers believe the U.S. economy is still on a path to recovery. * Although fiscal policy and inventory restocking will likely be providing less impetus to the recovery than they have in recent quarters, rising demand from households and businesses should help sustain growth, Bernanke said.
SUBODH KUMAR, CHIEF INVESTMENT STRATEGIST, SUBODH KUMAR & ASSOCIATES, TORONTO:
Starting the comments with comments that the outlook is weaker than it was in April, that has set the tone for what is happening in the market right now.
The earnings reports suggested a weaker outlook, but it can't be much clearer when the Fed says its own expectations have been reduced.
The markets are looking for certainty, but the only certainty right now is that the Fed will stay with its easing monetary policy, at least until the middle of 2011.
BRIAN DOLAN, CHIEF CURRENCY STRATEGIST, FOREX.COM, BEDMINSTER, NEW JERSEY:
Reaction is basically turning into a spasm of despair. The market was looking for some form of concrete action from Bernanke, a commitment to do something. All we got was that they're aware of the risks and are prepared to take as yet unspecified actions. That's why we're seeing Treasuries rally, the yen crosses come off and the euro below $1.2770. In FX, the yen crosses are your real indicator of risk aversion. Neither the U.S. nor euro zone economy is in great shape, and that obviously bodes ill for the global recovery.
CARY LEAHEY, ECONOMIST, DECISION ECONOMICS, NEW YORK:
Bernanke's testimony held few surprises. I'm surprised the market isn't trading off more because it rallied in anticipation of his comments. The market got ahead of itself but Bernanke gave no indication the economic outlook had deteriorated very much. He gave no sense they were ready to do a U-turn on the exit strategy. The somewhat positive comment he made that the Fed would do whatever it needed to do, that's boilerplate language. He didn't tie weakness to policy actions.
STEPHEN MASSOCCA, MANAGING DIRECTOR, WEDBUSH MORGAN, SAN FRANCISCO:
Obviously, there were some cautious comments that started the market moving down. but it doesn't take much to move the market one way or the other. I don't really think he said anything new in there, but people see sentences like 'We also recognize that the economic outlook remains unusually uncertain,' so...I'm not reading that much into, but obviously the market is taking a little dip here on the content of those comments that were just released.
It'll be interesting to see some of the questioning.
NICK KALIVAS, SENIOR EQUITY INDEX ANALYST, MF GLOBAL, CHICAGO:
It's pretty much as people expected. In the minutes they revised down their growth outlook and their inflation projection and I think his statements are consistent with that.
It's been communicated that there's been a pickup in economic uncertainty ... He's leaving the door open to provide aid if needed, but I don't think we're at that point.
The equity market sold off a little bit here after that, but I'm not sure I see any justification based on these statements.
KEITH HEMBRE, CHIEF ECONOMIST, FIRST AMERICAN FUNDS, MINNEAPOLIS, MINNESOTA:
They had to acknowledge that things have softened up, things are more uncertain than what they had thought before.
I'm surprised that he said inflation is likely to remain subdued over the next several of years. I don't know that that's necessarily a unanimous conclusion amongst the FOMC. It certainly fits with our view but there are some hawks that might take issue with that statement.
The pressure will be on them to be as stimulative as possible. That means continuing to highlight the 'extended period' phrase, certainly not selling the assets that they purchased over the past year as just a few months was being talked about by certain FOMC members.
KARL MILLS, PRESIDENT, JURIKA, MILLS & KEIFER INVESTMENT PARTNERS, OAKLAND, CALIFORNIA:
He's walking this inflation/deflation tightrope. He's got to let people know they still have some available tools in case of emergency. They are not worried about inflation but they are thinking about it. They know that people are worried about the debt levels.
So essentially he's trying to say nothing while appeasing both the recession and the debt camps. The minutes are probably much more meaningful than the testimony -- he's not going to say anything to rock the market too much.
He didn't pull any bunnies out of the hat and the market kind of knows where he is. They want to know that he has a few tools left in the playbook because there is that camp that says he's out of ammunition.
SEBASTIEN GALY, SENIOR CURRENCY STRATEGIST, BNP PARIBAS, NEW YORK:
It's basically what we expected - slightly more dovish, more conditional, recognizing the uncertainty in the system. But the market was pricing this in, with the yield curve already pretty low ahead of this. The curve has fallen a few basis points, though it's probably automated trading, because it doesn't seem like such a major surprise. In fact it's already coming back. So that shows the bond market was positioned for this. As the curve recovers a bit, we should see dollar-yen edge back up.
OMER ESINER, CHIEF MARKET ANALYST, COMMONWEALTH FOREIGN EXCHANGE, WASHINGTON:
(Ben) Bernanke is being more dovish than recent Fed commentary and his remarks are consistent with the noticeable downturn in the economy. He is also echoing the sentiment in the FOMC minutes that the Fed is prepared to take further action as needed. Bottom line: Additional monetary and credit easing remains on the table. That will keep U.S. yields depressed. And once the dust settles, all of this is going to be negative to the dollar.
ZACH PANDL, U.S. ECONOMIST, NOMURA SECURITIES, NEW YORK
The key point that we were looking for in the statement, it was there. Bernanke is saying the Fed has tools available and is willing to use them if necessary.
He's still pretty close to the minutes last week. They have a cautious outlook. He's talking about unusual uncertainty, with a skew toward downside risk.
GARY THAYER, CHIEF MACROSTRATEGIST, WELLS FARGO ADVISORS, ST. LOUIS, MISSOURI:
Bernanke is saying with the outlook on the economy still uncertain the Fed will do something if needed and that takes away the concerns about interest rates rising any time soon. He's repeating the pledge to keep rates low for an extended period of time, saying inflation is likely to stay low for the next several years. That's a good indication the Fed is not worried that its policies are too stimulative. It removes worry for fixed-income investors that inflation could eat away the value of their income.
LAWRENCE GLAZER, MANAGING PARTNER OF MAYFLOWER ADVISORS, BOSTON:
The testimony was not particularly optimistic. It implied that the Fed had a relatively cloudy view of the future. It appears to be a lower inflation, lower interest rate, lower growth type of statement.
That would favor higher quality fixed income; high grade corporates, and certainly it is favorable for Treasuries.
MARKET REACTION: STOCKS: U.S. stock indexes slipped BONDS: U.S. Treasury debt prices rallied DOLLAR: U.S. dollar rose against the euro, fell against the yen