BEN IS IN! Big Ben Bernanke (pronounced Ber-NANK-kee) got the nod last week to take the reins in 2006 from retiring Fed Chairman Alan Greenspan. The new man in the Chair has superb credentials, but is known for being more “dovish” than “hawkish” in the fight against inflation. Right or wrong, the perception among Traders that Bernanke might not fight as hard to curb inflation brought Bonds under selling pressure, as inflation is the main enemy of fixed return assets such as Bonds. Over the course of the week, home loan rates rose accordingly by about .125 across the board.

More good news for the housing sector, as Existing Home Sales numbers for September were strong at 7.28 million sales... better than expectations and the second highest rate ever. The closely watched existing home inventory level was reported unchanged from last month at 4.7 months. This inventory level remains near record lows and suggests continued strength in the Housing market.

DID YOU KNOW... THAT MR. BERNANKE REGULARLY EATS IN THE CENTRAL BANK CAFETERIA, MAKING HIMSELF AVAILABLE TO STAFFERS AND COLLEAGUES TO DISCUSS HIS VIEWS? DID YOU KNOW... THAT HE BEGAN COLLECTING ACADEMIC HONORS EARLY, WINNING THE SOUTH CAROLINA STATE SPELLING BEE IN 1965, BUT WAS ELIMINATED AT NATIONALS BY MISSPELLING “EDELWEISS”? FOR MORE ON OUR NEXT FED CHAIRMAN, DON’T MISS THIS WEEK’S MORTGAGE MARKET VIEW.

The economic calendar is loaded with potential market movers this week, including the Fed Meeting and Policy Statement on Tuesday afternoon. Another .25% hike to the Fed Funds Rate is a lock, but as always, the markets will dissect every word uttered by Mr. Greenspan... especially during his final months in office. Inflation has been on the rise, and on the heels of Bernanke’s appointment, Traders will be listening extra carefully for any clues or hints as to what the Fed is thinking.

This week also brings another Jobs Report, which can impact the trend of home loan rates for days and sometimes weeks following the release. Now remember that good economic news tends to be bad for Bonds and home loan rates. This means that if the upcoming Jobs Report shows better than expected new job growth – or a significantly lower than expected loss of jobs due to the hurricanes – Bond pricing and home loan rates could easily continue on their present path and worsen a bit further.

On the other hand, a weak Jobs Report would help Bond pricing and home loan rates to improve... but because Bonds have been in such a powerful downward trend of late, it would take a real stinker to see much improvement.

Dr. Ben S. Bernanke, Our Next Federal Reserve Chairman

Brief Biography

Ben S. Bernanke was born on December 13,1953, in Augusta, Georgia. He received a BA in economics in 1975 from Harvard (summa cum laude) and a PhD in economics in 1979 from the Massachusetts Institute of Technology. Before becoming a member of the Federal Reserve Board of Governors, Dr. Bernanke served as a Professor of Economics and Public Affairs at Princeton since 1985. Dr. Bernanke was also sworn in on June 21, 2005 as Chairman of the President's Council of Economic Advisors.

Dr. Bernanke has received many national awards and recognition for his work, and has published many articles on a wide variety of economic issues, including monetary policy and macroeconomics, and he is the author of several scholarly books and two textbooks.

Beliefs and Views

Dr. Bernanke is an advocate of a strategy called inflation targeting where a central bank specifies a numerical goal for prices. The Fed debated the strategy last February, and decided to table the discussion. Bernanke is unlikely to push the strategy unless he can gain approval from the rest of the Fed members. This is presently unlikely, as Fed Governors Roger Ferguson and Donald Kohn are known to be opposed to the strategy.

The current belief by the financial markets is Bernanke is more of a “dove” than a “hawk” when it comes to raising interest rates. This is based upon past speeches dating back as far as 2002. In a November 2002 speech about the potential for deflation in the economy that has since become famous, Bernanke campaigned not only for looser monetary policy but also for the Bush tax cuts, both of which could generate "positive inflation" to prevent deflation.

In a recent interview with The Times of London, Bernanke didn’t seem very concerned that energy-related inflationary pressures would bleed into core inflation. He stated, "The evidence seems to be that it is primarily in energy and some raw materials and has not fed into broader inflation measures or expectations. My anticipation is that's the way it's going to stay." Bernanke also voiced a “dovish” opinion on the federal budget deficit by stating it was about 2.6% of GDP this year and "that's not far above the long-term average."

As far as the US current account deficit is concerned, Bernanke blamed "a global savings glut," for the deficit during a speech in March 2005. Bernanke said the deficit was the result of “a shift that has transformed developing economies from borrowers on international capital markets to large net lenders to the developed world and the US”. This suggests Bernanke's strategy to reduce the current account deficit would not stress the need for higher US interest rates to promote more savings at home. As an alternative, Bernanke would likely try to apply pressure on China to hasten the process of unpegging their currency (the Yuan) from the Dollar. Theoretically, this would increase US exports and reduce the huge trade deficit we have with China over time... yet it could cause home loan rates to rise more quickly.

Impressions

Although his views appear to be more “dovish” toward inflation than Alan Greenspan, Bernanke has stressed there would be continuity between his leadership and the legacy Greenspan is leaving behind. Plus, as Chairman, Bernanke will have to build solid consensus among all of the voting Federal Reserve members in order to craft Fed Policy, as policy cannot consist solely of his views and beliefs. It is likely that the Fed will continue to raise the Fed Funds Rate until it reaches 4.5% sometime during the first quarter of 2006. The Fed should then pause and reassess their rate tightening cycle at that time.

Dr. Bernanke absolutely has a first-rate mind and is just as sharp as they come. He's the product of Ivy League schools, a member of the National Bureau of Economic Research, a highly respected macroeconomist, and the former chair of Princeton 's economics department. We expect Bernanke will be a good communicator of Fed Policy as he tends to speak plainly and wants Fed Policy to become more transparent. While Bernanke is quite serious, very disciplined, and rather soft-spoken, he will bring intellectual leadership, verbal power and precision, and a prodigious work ethic as Chairman of the Federal Reserve. His willingness to speak his mind stems from a conviction that clear communication goes hand-in-hand with good monetary policy.

The economic calendar is loaded with high profile economic reports this week. And remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.

Economic Calendar for the Week of October 31 – November 04