When in doubt, wait for the next set of data. Federal Reserve chairman Ben Bernanke will face an uphill struggle if he wants to establish a hawkish reputation. Attributing the inverted yield curve to lower term premiums that would reflect stable long-term investors' expectations and helped further by the global savings glut, Bernanke turned conventional wisdom upside-down in a speech on Monday evening.
He is confident that the $25 trillion market for dollar bonds is so large that it "should be able to absorb purchases and sales of large absolute magnitude with relatively modest changes in yields." Historically low long-term yields may influence the Fed's decision process towards more accommodation, Bernanke indicated. "To be consistent with a lower long-term real rate, the short-term policy rate might have to be lower than it would otherwise be as well."
Bernanke's outlook on future monetary policy was less confident. He said, policymakers would have too monitor multiple signals from financial variables. "Ultimately, a robust approach to policymaking requires the use of multiple sources of information and multiple methods of analysis, combined with frequent reality checks. By not tying policy to a small set of forecast indicators, we may sacrifice some degree of simplicity, but we are less likely to be misled when a favored variable behaves in an unusual manner," Bernanke said.

PICTURE: Fed chairman Ben Bernanke will rather keep rates too low too long, remarks contained in his latest speech show. Courtesy of kids.christianpost.com

I wonder whether Bernanke's emphasis on a complete monitoring of economic data allows the conclusion that the Fed board is as unsure of the future implications of global imbalances as the rest of the world. While saying that the bond market had weathered reduced foreign demand and offered low yields as proof, he never mentioned the record-breaking current account deficit once. His predecessor Alan Greenspan had been more outspoken on the sword hanging above the global economy.
Recent tame consumer price data may offer time for a breather but producer prices, expected later today, may confirm what markets are already expecting. According to David Altig's Fed funds probabilities model the Fed will hike rates another 25 basis points to 4.75%. After that is is still crapshoot, he writes.
Tim Duy has rounded up all recent Fed speeches plus some comments and expects the Fed to pause after the next step.
My bets lie with a pause at 5% but I still see Fed funds between 5.25% and 5.75% later this year. Oil's 4% correction won't last long enough to ease inflationary pressures and higher producer prices especially for energy and raw materials will keep the pressure on the Fed if it wants to remain a credible inflation guard.