The Fed Chairman is trying to soothe legislators on the potential threat of a spread in subprime lending woes. He also suggests inflation and inflation expectations are not feeding on themselves. That would leave policy unchanged despite overwhelming evidence that the economy is slowing with or without housing.
Bernanke told the Joint Economic Committee that current Fed policy is appropriate given the outlook for both economic growth and prices. He notes the slowdown in nonfarm business productivity in recent quarters but says the trend in worker efficiency remains constructive and likely to contain inflation. Core inflation remains stubbornly and "uncomfortably high," he offered.
Regarding his depiction of "solid" consumer spending, most disagree. Retail sales were anemic in the first two months of this year and net of gasoline should be equally disappointing in March.
At the heart of his testimony, distress in the subprime lending market increase concerns for the housing market but Bernanke told the Committee that the broader impact on prime lending and housing turnover is probably controlled.
The stock market seems to accept his remarks as a fairy tale; the Dow has doubled its losses prior to Bernanke's prepared remarks. Overseas bourses are widening their price declines in sympathy.
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