It’s Bernanke’s Story and…

It’s Bernanke’s Story and…

Another week has brought more fedspeak from Federal Reserve Chairman Ben Bernanke. This time, Mr. Bernanke testified to the Senate Banking Committee, commenting on the economic outlook, credit conditions and the central bank's options on monetary policy. The Chairman noted that conditions have deteriorated and the Fed is open to reducing the federal funds rate further if circumstances call for such a move. Nonetheless, Bernanke maintained his stance, one that is not without merit, that even with the imploding housing market, the worsening credit crunch, fragile consumer spending and anemic business confidence, recession is not imminent, merely a potential threat.

Bernanke's and Treasury Secretary Henry Paulson's (who also testified) shared ‘optimism' didn't sit well with some members of the committee, particularly Democrats, which inevitably led to some heated exchanges. On the whole, since real GDP expanded less than 1 percent in the fourth quarter, the line between recession and what the Fed Chairman sees as nothing worse than slower growth is a very thin one.

In other news, the trade deficit narrowed much more than expected in December. A smaller trade deficit could be considered a positive, as it signals the possibility of an upward revision to last quarter's reading on real GDP growth. Some analysts (subscription required), however, see it as yet more evidence of an economic slowdown due to a sizable decline in real nonpetroleum imports-a proxy measure for consumer demand. All subcategories of non-crude imports fell, but the largest portion unsurprisingly came from the autos and this segment has been dogged for months by sluggish sales. If the broader trend of shrinking nonpetroleum imports continues, it could portend a recession, but until then the situation warrants keeping a close eye.

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