Experts Talk Bernanke Testimony, EU Summit, Tax Changes

Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Mar. 24.

Kim Rupert and Michael Wallace, Action Economics

Fed Chairman Bernanke didn't really provide any new insight on policy [in his Mar. 25 testimony before the House Financial Services Committee] as he generally summarized some "key points" from earlier testimony. He said the economy still needs accommodative policies and reiterated the "extended period" language. He noted the phasing out of its lending programs as financial conditions have improved and the normalization of the terms of regular discount window loans. He didn't indicate any further hike in the discount rate is imminent, and he reiterated that these actions are not expected to lead to tighter financial conditions and hence don't constitute a tightening of monetary policy and shouldn't be interpreted as signaling any change. He did say that policy will need to be tightened in "due course" and ensured that the Fed has the tools to withdraw stimulus when necessary. But the timing of such will depend on the economic outlook. As with last week's FOMC statement, Bernanke is showing no urgency to pull the tightening trigger.

[In response to questions from lawmakers] Bernanke said asset sales would occur with other policy moves to tighten up interest rates, but none of these operations will occur before the economy is on its feet again. The Fed plans for asset sales to be slow and gradual and will be announced well in advance.

A question on when banks will start lending and stop buying short-term Treasuries, suggesting the Fed has some control over such, indicates ignorance from some on the House Finance Services Committee about banking and the Fed. Bernanke corrected [the questioner] and said the Fed is not blocking bank use of funds in any way.

The Fed owns [the] smallest share of Treasuries in many years, back to pre-crisis levels, and has not been monetizing the debt after buying $300 billion in securities, said the Chairman. This was in response to a question of the Fed running a new "Ponzi scheme" amid Pimco reports of the Fed buying some 90% of paper last year, which Bernanke rejected. … He sees the Fed's balance sheet coming back under $1 trillion and does not expect the unwinding of its emergency programs to be disruptive.

Joseph LaVorgna, Deutsche Bank

Initial jobless claims fell 14,000, to 442,000, in the latest week, the lowest reading since 442,000 in the first week of February. This lowered the four-week moving average by 11,000, to 454,000. Continuing claims fell 54,000, to 4,648,000. While the initial claims figures correspond to the week after the employment survey period, this week's numbers are relevant in that they reinforce the notion that another downtrend is forming. As such, we view the data as supportive of our +350,000 projection for March nonfarm payrolls [scheduled for release on Apr. 2].

Much of the March payroll increase will be due to temporary hiring for the Census and payback from depressed activity in February as a result of the snowstorms.

For the longer term, we will probably need to see jobless claims below 400,000 for the economy to post sustainable job gains. We are projecting the 400,000 milestone to be crossed sometime in April.

Vassili Serebriakov, Wells Fargo Bank

Currency markets remain predominantly focused on economic and political developments in the euro zone, with today's European Union summit being watched closely. The euro fell to a new low but bounced back, thanks to comments from [European Central Bank] President Trichet who said that the central bank's less stringent collateral requirements will be extended beyond 2010. This removes one source of worry for the euro, but bigger concerns are still in place, including Germany's position that the International Monetary Fund should be part of any bailout.

Given the extent to which the euro project has been politically driven, the lack of political agreement to deal with the fiscal crisis within the European Union continues to hurt confidence in the single currency.

Alec Phillips, Goldman Sachs

Tax policy has gained attention in recent days as a result of the tax increases used to pay for health reform. In fact, this is just one of several potential tax debates over the next several months, with the expiration of the 2001-2003 tax cuts and stimulus tax provisions scheduled for yearend, proposed and recently enacted corporate tax proposals, and the possibility of some form of consumption tax on energy or, in the longer term, a broader value-added tax. There is little possibility of changes for 2010, apart from the expiration of some stimulus-related provisions, but tax rates in 2011 are almost sure to rise on higher incomes as well as capital income.

One consideration for lawmakers will be the different effect that tax policy can have in a zero-interest rate environment. This may reduce the negative effects associated with increased taxation of labor and capital but could exacerbate the negative effect of any increase in consumption-related taxes.

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