Edward Hugh (he of A Fistful of Euros) took a break from his research labors to give me the heads up on this item from Bloomberg, helpfully informing us what new Federal Reserve Chairman Ben Bernanke will be saying when he testifies before Congress this week:
Gentle Ben he won't be.
Ben Bernanke, appearing before Congress this week for the first time since becoming Federal Reserve chairman Feb. 1, is likely to brush aside lawmakers' calls for a pause in the central bank's credit-tightening campaign and vow vigilance against inflation, analysts say.
Cementing the Fed's inflation-fighting credibility at a time of regime change at the central bank is particularly important because some in the markets are already suspicious that Bernanke will be soft on inflation. Behind those concerns: Bernanke's suggestion in 2002 that the Fed would pull out all stops if needed to fight a deflationary downturn in the economy, a strategy he compared to a "helicopter drop'' of money.
"He's given his helicopter speech and established his anti- deflation credentials,'' says Tom Gallagher, Washington-based senior managing director at ISI Group, a New York money- management and research firm. "Now he's got to give his howitzer speech and establish his anti-inflation credibility...
There are risks to Bernanke's taking a tough stance against inflation. If he raises rates too far, he runs the danger of bursting what Yale University economist Robert Shiller has called the biggest property bubble ever.
Already, there are signs the housing market is cooling off. Toll Brothers Inc., the largest U.S. builder of luxury homes, said on Feb. 7 that fiscal first-quarter orders plunged 29 percent as buyers waited to see whether prices would fall.
Fed staff economists are convinced that the economy is strong enough to withstand a slowdown in the housing market. Armed with their reassurances, Bernanke is likely to try to burnish his inflation-fighting credentials.
"He's going to err on the side of hawkishness, not dovishness,'' [Lawrence Lindsey, a former Fed governor and chief economic adviser to President George W. Bush who now heads his own consulting group] says.
There you have it.