Wednesday, July 19, 2006

Ben Bernanke Speaks, Markets Jump up

Ben Bernanke spoke in front of the Senate today and gave the market a pretty clear indicator that the Federal Reserve was not attached to the idea of raising rates again. If you watch the market at all you know that the market shot up in response.

Some people had been worried about rates Tuesday when output at factories, mines, and utilities rose 0.8% in June and May was revised upward from -0.1% to +0.1%. Overall manufacturing is up 5.7% from last year. The details showed that the increases also, FINALLY, came from tools and equipment that indicate increased business spending.

The additional industrial purchasing does not come as much of a surprise since industrial utilization last month reached 82.4%, the highest point since June of 2000. The high utilization rate means producers are close to their capacity limits and is a sign that hiring and tool purchases must increase.

Sure enough, that was the report: 0.8% month to month growth and increased business purchasing.

The increasing industrial activity is an indicator of inflationary forces and the market had become concerned that the Fed would feel forced to increase rates. In Senate testimony today Bernanke said a moderation in U.S. growth "now seems to be under way," which "should help to limit inflation pressures over time." He also said that "the recent rise in inflation is of concern" but his comments all together indicated that the Fed was likely to hold off on judgment until more data arrived.

More data is streaming in though. John Engler, president of the National Association of Manufacturers was quoted as saying the manufacturing sector “continues to see good news.” Numerous manufacturers are set to increase their manufacturing. Christian Brahler president of TT Technologies, was quoted in the Wall Street Journal as saying “In our industry, everything is really flat out. It’s probably [the first time] in my lifetimes that there is a demand for everything everywhere.”

All together it seems that the Fed might take a brief break from raising rates (or may not), but that there are still inflationary economic forces going on and in the long run it is likely that rates have farther to go.
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