Sunday, June 10, 2012

Will Ben Bernanke and the Federal Reserve provide more monetary stimulus?

On Thursday, U.S. Federal Reserve Chairman Ben Bernanke’s testimony to the Congress included comments on: 
  • The housing market - it has “been an important drag on the recovery. Despite historically low mortgage rates and high levels of affordability, many prospective homebuyers cannot obtain mortgages, as lending standards have tightened and the creditworthiness of many potential borrowers has been impaired” and “a large stock of vacant houses continues to limit incentives for the construction of new homes, and a substantial backlog of foreclosures will likely add further to the supply of vacant homes. However, a few encouraging signs in housing have appeared recently, including some pickup in sales and construction, improvements in homebuilder sentiment, and the apparent stabilization of home prices in some areas”,  
  • Government spending and the U.S. fiscal cliff – lacking Congressional action on spending/ taxes before year-end, the economy could take a hit of “ between 3 and 5 per cent of GDP, which would have a significant impact on the near-term recovery”,
  • the Eurozone: “the situation in Europe poses significant risks to the US financial system and economy and must be monitored closely, and
  • Labor market – “the larger gains seen late last year and early this year were associated with some catch-up in hiring on the part of employers who had pared their workforces aggressively during and just after the recession”.

Many investors assume that additional economic weakness will trigger more stimulus efforts by the Federal Reserve.  Questions to consider include:
  • have such stimulus efforts reached the point of diminishing returns and  
  • can Congress effectively address the challenges confronting the U.S economy?

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