Using Bernanke's Speech to Set Your Trades for the Rest of the Year

Federal Reserve Chairman Ben Bernanke spoke to a group of bankers on Tuesday. In his speech, he reiterated much of what he has said in countless speeches over the past several weeks. However, he laid out fairly concrete expectations for the economy in 2011 that smart traders could take advantage of to profit. Bernanke expressed a belief in inflation being a temporary phenomenon. He stated that the Federal Reserve had done much to help the U.S. economy, but could not be called on to solve all its problems. He denied that the Fed was to blame for overheating in emerging market economies. Bernanke acknowledged that consumer prices have increased due to the rising price of gasoline, but blamed gasoline's bull-market on global factors unrelated to Fed policy. He stated clearly that the Fed would remain "accommodative" in its monetary policy decisions so long as job growth remained sluggish. Most importantly, he predicted that growth would pick up in the second half of 2011. If Bernanke is right, U.S. equities may rally as the U.S. economy strengthens. Job growth would accelerate, and the Fed could tighten policy to prevent inflation. But what if Bernanke is wrong? If Bernanke is wrong, and the U.S. economy does not strengthen over the second half of the year, the Fed may have to engage in a third round of quantitative easing. Alternatively, if the economy weakens and the Fed does not act, equities may tank.

Traders who believe that Bernanke is right in his assessment of future U.S. economic growth might want to consider the following trades:

Traders who believe that Bernanke is wrong in his assessment of the U.S. economy, and that there will be no meaningful economic growth for the rest of the year, may consider taking positions in the following: