Federal Reserve Chairman Ben Bernanke strongly defended the U.S. central bank's bond-buying stimulus before Congress on Tuesday, saying its benefits clearly exceed possible costs, and urged lawmakers to avoid sharp spending cuts set to go into effect on Friday.
Separately, new U.S. single family home sales hit a four-and-a-half year high in January, while consumer confidence rebounded in February.
U.S. consumer confidence picked up much more strongly than expected in February as Americans shrugged off worries over fiscal policy and tax increases, a private sector report showed on Tuesday.
NEW HOME SALES:
New U.S. single-family home sales surged to their highest level in 4-1/2 years in January and the month's supply of houses on the market was the smallest since March 2005, further evidence the housing sector recovery is gaining muscle.
KEY POINTS: * Bernanke said Fed policymakers are cognizant of potential risks from their extraordinary support for the economy, but said the central bank has all the tools it needs to retreat from its monetary support in a timely fashion. * "To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation," Bernanke said in remarks prepared for delivery to the Senate Banking Committee. * The Conference Board, an industry group, said its index of consumer attitudes accelerated to 69.6 from a downwardly revised 58.4 in January, handily topping economists' expectations for 61. It was the highest level since November.
MICHAEL JONES, CHIEF INVESTMENT OFFICER OF RIVERFRONT INVESTMENT GROUP IN RICHMOND, VIRGINIA:
"Nothing that he said about QE or Fed policy surprised me. His stridency on the sequester was a surprise to me and, I think, financial markets. He really elevated the risk of the impending cuts to the economy, higher than I would have actually thought that they were.
"He really came down foursquare on the bearish camp with respect to the potential economic impact of these cuts. That's a surprise and that's probably why the market's a little nervous right now.
"His comments were unambiguous that he sees the risks of premature withdrawal from QE as way more risky than staying at the party too long and continuing the QE too long."
ROBERT TIPP, CHIEF INVESTMENT STRATEGIST, PRUDENTIAL FIXED INCOME, NEWARK, NEW JERSEY:
"The U.S. data today was a little bit pushed to the side. The major issues here are the uncertainty created by the Italian election and whether you will have a major risk unwind because of that and whether you were going to get some equivocation from Bernanke that was going to throw fuel on that fire. The market needed to hear something reassuring from Bernanke: that the Fed was there, was going to provide support, and was nowhere near to backing away. They got that.
"Bernanke has a tough job here. In the big picture he needs to instill confidence the Fed will not make the mistakes it made in the past, that it won't start some premature and excessively rapid tightening the way it did in 1994 when they hiked aggressively and almost pushed us into recession the next year.
"More analogous to our current situation is the example of the Great Depression where the Fed was insufficiently accommodating against a deflationary backdrop. That's really more similar to the situation we have now where there is a high level of debt and a need to ensure that the economy achieves escape velocity.
"The problem is people on his committee and elsewhere are concerned about excesses potentially created by quantitative easing and eventual inflation. So Bernanke has to go through this cost-benefit analysis.
"But at the end of the day he needs to get the market comfortable that the Fed has its eyes open. They will not create an asset bubble and not stay accommodative too long. But right now they must stay accommodative and confidence in that message is critical. Because if that message doesn't come through, rates won't stay down and you won't get that stimulative boost to the economy they are looking for.
"The Fed went through this exercise of coming up with a 6.5 percent unemployment rate threshold which in and of itself shows how high the strains are on this committee because once that level is reached, pressure will be intense to reduce accommodation. But that 6.5 percent level is still above the peak unemployment rate of the last recession which was 6.3 percent in June 2003."
STEPHEN MASSOCCA, MANAGING DIRECTOR, WEDBUSH MORGAN, SAN FRANCISCO:
"I don't think there's anything new or different or unusual in Bernanke's comments, so I don't think there's anything market moving in them that I've seen.
"In terms of the home sales numbers, they were good. I still think you have a lingering impact from the Italian elections yesterday, and those concerns will continue to swirl and hold back any rally in the market. There was an out-of-the-blue decline in the market right at the end of the day that came out of nowhere. What we've done this morning is recapture that ground. Some sort of program or large seller assaulted the market at the end of the day. That more than anything is the genesis of this rally.
"I think the market will continue to be better than worse. Monetary policy is very aggressive, not only here but worldwide and over a longer-term perspective, that's very bullish.
"In terms of the day-to-day jitters in the marketplace, this issue in Europe is going to hang as a pall over the market at least the next few days or even weeks.
"The possibility that there could be an anti-euro government in Italy is going to alarm the market and until that either comes to fruition or is dispelled, it's going to be an issue."
OMER ESINER, CHIEF MARKET ANALYST AT COMMONWEALTH FOREIGN EXCHANGE, WASHINGTON D.C.:
"My initial read of Bernanke's comments, while not surprising, do essentially continue to try to justify the Fed's very accommodative policy stance, kind of contrary to the minutes that we got last week. Bernanke is arguing that continued stimulus is necessary despite nascent signs of improvement in the economy. We expected Bernanke to hold his ground in terms of arguing for quantitative easing so I don't expect a major market reaction to this statement. If anything, it highlights a very divided state of the Fed right now.
"Economic data was very positive. We saw pretty much a blowout number in terms of new home sales. Very strong sales across the country and notably we see the supply of homes remains at multi-year lows so that's having a positive impact on prices. Consumer confidence was a blowout number as well. On balance, a status quo statement from Bernanke while the data does highlight continued improvement in the economy."
DAVID ADER, HEAD OF GOVERNMENT BOND STRATEGY, CRT CAPITAL GROUP, STAMFORD, CONNECTICUT:
"The (Treasuries) market is off on all this, but really we're focusing more on Bernanke who sounds pretty standardly dovish, sustain easing, has tools to tighten. He's not a threat so we're really responding to the data in our view."
JOSEPH TREVISANI, CHIEF MARKET STRATEGIST, WORLDWIDEMARKETS, WOODCLIFF LAKE, NEW JERSEY:
"He is saying what you would expect. The benefits of the Fed's easy monetary policy outweigh any potential danger and are a benefit to the economy. No one should have expected Bernanke to say anything else. This will limited affect on the dollar but should put to rest speculation that the Fed is contemplating an end to quantitative easing."
LAURA ROSNER, U.S. ECONOMIST, BNP PARIBAS, NEW YORK
BERNANKE: "He remains very committed to QE. He did go into details about the potential costs to Congress. At some point in the text he said the benefits (of QE) outweigh the costs. It's consistent with the January FOMC minutes. He seems a little more optimistic about growth than the last quarter. He also points out that the Fed's accommodative stand has been critical in sustaining the recovery."
PETER CARDILLO, CHIEF MARKET ECONOMIST AT ROCKWELL GLOBAL CAPITAL, NEW YORK:
"The economic news is certainly coming in better-than-expected. Case-Shiller, new home sales that beat expectations and manufacturing index is also at the plus side. What Bernanke is saying, bottom line, indicates that there will not be a reversal anytime soon in the stimulus program. Of course we will have to wait until the Q&A to see what he really says, and market reaction to that may be more than what we are seeing now."
DAVID SLOAN, ECONOMIST, 4CAST LTD, NEW YORK:
"The numbers are all pretty strong. It is a significant rise in confidence and a strong rise in new homes sales -- there is not really much to argue in those numbers. The Richmond Fed also improved.
"The fiscal cliff worries seem to be fading. Home sales is quite surprising given that some of the other sales indicators were not so impressive. We have seen a few numbers that have been slightly disappointing but these latest numbers suggest that overall the housing market recovery is still generally there, with some volatility in the data."
MIKE SHEA, MANAGING PARTNER AND TRADER, DIRECT ACCESS PARTNERS LLC, NEW YORK:
"This is about what we were expecting. I don't think you would have heard the chairman criticize his own policies. His job is to explain to Congress what he's doing and why, which we already know. This is more of a formality. If Bernanke were to give any nugget of information about when QE might end, that would move markets, but we haven't seen anything like that."
STOCKS: U.S. stock indexes added to gains briefly, and pulled back
BONDS: U.S. bond prices slipped
FOREX: The dollar rose against the euro and yen
(Americas Economics and Markets Desk; +1-646 223-6300)