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Market Overview

Bernanke Testifies on Capitol Hill


On Tuesday morning, Federal Reserve Chairman Ben Bernanke gave his semi-annual monetary policy briefing to the Joint Economic Committee. In his testimony, he said that recent economic indicators have been disappointing. He did note that the Fed stands ready to act if needed and sees risks of a spill-over from Europe's slowdown.

Traders had been looking for further signs of easing from the Fed in this testimony. At the June meeting, the Fed decided to extend Operation Twist through the rest of 2012 when many had hoped for another round of quantitative easing. Recent economic data, including non-farm payrolls and GDP for the second quarter, have remained sluggish and the Fed has been discussing new ways to boost the U.S. economy.

Speculation has been rising amongst market watchers that the Fed is considering a different type of policy action than quantitative easing to boost the economy. Recent reports have indicated that the Fed may launch a plan similar to that of the Bank of England. Recently, the BoE announced a new plan in which it is giving incentives to banks to make new loans. For banks that lend the most, the BoE is set to give cheaper financing, hopefully acting as an incentive to boost credit growth.

In his speech, he took a very a negative tone, citing that employment gains are likely to be frustratingly slow. Bernanke is also very concerned with the U.S. fiscal situation, citing that there are macroeconomic risks from the the "U.S. fiscal challenges." He noted that controlling deficits should be the highest priority of politicians fiscally.

On policy, Bernanke expects the Fed to keep rates low through 2014, as previously stated. He also noted that the F.O.M.C. could ease further in the event that data deteriorates further. Bernanke says that GDP growth is trending between 1.9-2.4% in 2012, as noted at the June meeting of the Fed.

U.S. 10-year yields fell slightly on the news from 1.4943 percent to 1.4759 percent. Gold and silver each fell on the headlines as did equity futures and indices. The EUR/USD fell as well from highs near 1.2300 to 1.2227.


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