Ben and Barry…..and Barney, too

There is an interesting dynamic surrounding the testimony of Fed Chair Ben Bernanke.

Let us consider the rate of economic growth.  Barry Ritholtz at The Big Picture expressed skepticism about the 3.5% rate of growth reported in the initial release for GDP growth in the Q4 06.  As more complete  data become available, the report will be revised at the end of February, and revised again before the final release at the end of March.  Barry argues convincingly that the growth rate will be revised down to about 2.5%.

Let us assume that Barry is correct in his forecast of the final number.  What are the implications of this?  Here is his conclusion:

If we were to add the Import/Export data to this, that dings this
even further downwards — We are looking at a GDP of potentially
2-2.5%.

If the economic deceleration continues on (as I suspect it will),
there is a very real possibility we will see GDP slip to 1-2% by mid
2007.

Goldilocks has left the building . . .

Meanwhile on Capitol Hill, Chairman Bernanke presented his view that economic growth was below potential (which the Fed seems to peg at 3% or a touch higher).  He and his colleagues seem quite satisfied with economic growth in the 2.5% range, while awaiting a further decline in core inflation rates.

House Financial Services Chairman Barney Frank challenged Bernanke on the current Fed bias toward tightening.  He believes that growth below potential means that the Fed should be just as likely to cut rates as to increase them.  The economy may be stronger than we think," Bernanke said. This could put upward pressure on prices.

Conclusions

Ben and Barry both think that the economy is probably growing at about 2 – 2.5%  The important difference is that the Fed Chair sees this as desirable, achieving what we call at "A Dash" the Glide Path.  In sharp contrast Barry Ritholtz sees the same data as a major problem.  Judging from the comments on his article, his many loyal readers agree.

Barney Frank, and most other Democrats in Congress, will always push for lower interest rates.  Imagine how the questioning will go someday if the unemployment rate pushs back up over 5%, a level more consistent with 2.5% GDP growth.

Most observers give the Fed Chair high marks for his leadership so far.  Despite this, anything he does he will have many critics in Congress and among market pundits.

Those of us invested in stocks hope that Mr. Bernanke keeps his resolution about sticking to public testimony, where he has been excellent.  Please!  No off-the-record chats with Maria Bartiromo.