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Experts Talk Bernanke, Dudley Speeches on Economy

Experts Talk Bernanke, Dudley Speeches on Economy

Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Apr. 7.

Michelle Meyer, Barclays Capital

Federal Reserve Chairman Ben Bernanke said [in an Apr. 7 speech that although the economy has seemingly stabilized, hurdles remain. In the short run, Bernanke points to the fragile housing market and the rising tide of foreclosures. In addition, the commercial real estate market remains "troubled," which could cause problems for banks holding commercial real estate loans.

The biggest trouble, however, is the job market. Bernanke expressed concern about high unemployment and weak hiring. He also noted more than 40% of the unemployed have been out of work for at least six months, which is particularly worrisome, as it suggests lower longer-term income and employment prospects. That said, Bernanke believes the most likely outcome is that economic growth will be sufficient to reduce unemployment, which should boost consumer confidence and bank lending.

In the long run, Bernanke sees two interrelated economic challenges: meeting the economic needs of an aging population and regaining fiscal sustainability. The aging population suggests a decline in labor force participation and more dependence on Social Security and Medicare programs. As such, he stressed the importance of putting forth a "credible plan" for meeting the long-run fiscal challenges.

Bernanke concluded on a more upbeat note, arguing that while daunting economic challenges remain, the U.S. will be able to meet them, as history has demonstrated the "inherent resilience and recuperative powers of the American economy."

Kim Rupert, Michael Wallace, Action Economics

New York Fed President William Dudley said [in an Apr. 7 speech] that uncertainty over asset bubbles was no excuse for inaction, as such bubbles occur with some frequency, though identification of proper tools to deal with them is key. … [Dudley] said that speaking up about their dangers was preferable to deflating them with policy, since history shows that bubbles are not very sensitive to short-term interest rates. Any regulation needs to be applied throughout the financial sector to have any impact, with authority diffused rather than centralized. He argued that credit bubbles were worse than equity bubbles, given their impact on the financial system.

In follow-up remarks, [Dudley] said a credible plan for fiscal tightening needs to be put in place, though it is not necessarily appropriate for now. He sees inflation expectations as well-anchored for now, though risks exist if they become unmoored. Dudley said big banks are in better shape, but small ones still need time to heal, and it is important to apply regulatory reform globally.

Bottom line in terms of policy: Dudley said we're still not seeing enough in terms of job gains, and the Fed funds rate needs to stay low for an "extended period."

Marc Chandler, Brown Brothers Harriman

According to Bloomberg data, the prices of sovereign credit default swaps show that in the past 24 hours or so, the risk of a Greek default has surpassed Latvia, previously the highest risk of default. To be sure, we are not saying that a default is imminent. The market is finding little succor in official Greek claims that this month's funding has been secured. The market is skeptical of Greece's ability to fund next month's maturity and coupon payment.

The absence of other focuses for foreign exchange traders in the early going today will ensure players stay riveted to the Greek bond market. It seems like it is the only news that matters today.