Tim Duy, the John Berry of the blogosphere, has his latest Fed outlook up on Mark Thoma's blog: More Fed Volatility. Always thoughtful and balanced. Here's an excerpt:
..I found Bernanke’s testimony yesterday to be remarkably consistent with the last FOMC statement and my interpretation of how the Fed likely views the data. I suspect he put great effort in creating a statement that lacked the appearance of flip-flopping. The economy is slowing, especially when compared to the heated pace of the first quarter. The slowing is mostly concentrated in consumer spending, while investment spending holds strong.
With regard to the slowing, the full impact of previous rate hikes has yet to be felt. With the economy anticipated to slow to potential, inflation pressures are expected to ease as well. The balance of risks remains titled toward inflationary conditions, but the timing of any additional moves is dependent upon incoming data.
If the testimony was indeed consistent with last FOMC statement, why did markets surge yesterday? My interpretation of events is that market participants, like myself, were mentally geared for a more hawkish Ben, and instead the Gentle Ben of the last FOMC statement sauntered up to the stage. The higher than expected reading on core CPI released earlier in the day only enhanced this fear that Bernake would turn hawkish.
My concern is that, although the Bernanke sounded soothing relative to expectations, the incoming data argue for another rate hike in August. Indeed, while Bernanke was sanguine about the growth outlook, he explicitly warned of the risk of inflation...
And, after reading the FOMC Minutes, what is his bottom line?
Bottom line: Bernanke’s testimony should not be viewed as a guarantee of a pause; the data remain the focus at the FOMC. A pause doesn’t mean done.