Friday Look Ahead: Bernanke Expected to Make Case for Fed

Fed Chairman Ben Bernanke is expected to restate the Fed's case for its controversial quantitative easing policy in an early morning speech Friday, but he may not take on his most vocal critics.

New York Stock Exchange
Oliver Quillia for
New York Stock Exchange

Bernanke, under fire abroad and at home, speaks at 5:15 a.m. New York time to the European Banking Conference, held in Frankfurt, Germany. He will take questions after the speech.

Besides Bernanke's speech, stock traders will be looking for carry-through from Thursday's rally. Dell's much stronger earnings could give some lift to tech. The company reported profits of $822 million, or $0.42 per share, up from $337 million or $01.7 per share. The company was expected to report $0.33 per share.

The Dow Thursday rose 173 points to 11,181, and the S&P 500 climbed 18 points to 1196. General Motors' return to the stock market was viewed as a positive catalyst, as were signs that Ireland may take funds to stem its banking crisis.

"I think we now could retest the highs," said John O'Donoghue of Cowen. O'Donoghue last week said he expected a five percent correction, but Thursday he said a four percent move lower in stocks may have been enough.

Fed Under Fire

Bernanke also takes the podium Friday under mounting pressure in the bond market, where rates have been rising in the face of Fed easing.

"I know the Fed is buying a lot of paper, but the market is long, and in the face of better data, we tend to push things lower." -BNP Paribas, Rick Klingman

"I think the Fed has been clearly on the defensive with response to the implementation of QE2, and I think that the chairman and the Fed is probably in one sense very happy that there is a record low print in the core CPI for October," said Robert Sinche, head of global foreign exchange strategy at RBS.

The Fed has said, since it first raised the idea of quantitative easing in August, that it was concerned that inflation is too low and that the economy is too weak to create jobs. The Fed program, announced in November, involves the purchase of $600 billion in Treasury securities, a program now underway.

But QE had a profound market impact on the dollar and risk assets even before it was announced in November, and countries around the world have complained about the effect a weak dollar has had on emerging economies. A number of countries have tried to stem the flow of economies into their economies with capital controls and other maneuvers.

China, an outspoken critic, has made moves to tighten and the idea that it will do more now that it is showing heightened signs of inflationspooked commodities markets in the last couple of days.

The markets are also very much aware of the assault on the Fed at home. Congressional Republicans have asked Bernanke to stop the program. Bernanke met privately with the Senate Banking Committee Wednesday and explained, among other things, that QE could help with the creation of 700,000 or more jobs in the next two years. Fed members have also disagreed among themselves about the program, even before it was announced, and they continue to make conflicting comments.

"Bernanke went to speak to some senators in a closed door session this week, but their best approach is to just do their job and not even acknowledge or discuss the political pressure on a central bank. My guess is (ECB President Jean-Claude) Trichet who is a staunch defender of central bank independence, if anything, he might make some comments," said Sinche.

"Trichet could say we deplore interference with the monetary policy decision process," he said.

While stocks and commodities rallied Thursday, the bond market continued to gyrate, with rates rising. Since the Fed announced its plan, rates have moved higher and in recent days, the bond market has been especially volatile. The 10-year was ended Thursday with a yield of 2.9 percent.

Much stronger-than-expected Philadelphia Fed survey data Thursday helped send bond prices lower and rates higher. It is the latest in a series of better than expected economic news.

"I know the Fed is buying a lot of paper, but the market is long, and in the face of better data, we tend to push things lower," said Rick Klingman, managing director at BNP Paribas.

Klingman and others in the Treasury market say another factor behind the rate rise is the backlash against the Fed's program. The Fed started making purchases under the program last week, which has not had the intended effect so far of sending rates lower.

"You had not only other governments criticizing it, but you had internal members of the Fed talking about whether it's a valid response. That doesn't give you confidence that the whole thing gets done. As we get better (economic) numbers, that's the big part of this move higher in rates," said Klingman. "The market priced in that we are going to have QE two months ago, but since then we have better data."

There are no U.S. economic reports due for release Friday.

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