Larry Kudlow

Call it the Bush-Bernanke rally.

 After two days of congressional hearings, new Federal Reserve Chairman Ben Bernanke delivered a "not-too-hot" and "not-too-cold" testimony that reassured financial markets -- driving up share prices by roughly 1 percent across-the-board, while gold, bonds and the dollar held flat.

 On the Bush side of the rally, the Senate voted 53-47 this week in favor of extending the president's investor tax cuts on dividends and capital gains. Joining in this breakthrough vote was John McCain, the senator who voted against these tax cuts when they were introduced in 2003. This is an important shift for the GOP presidential frontrunner -- and another big win for pro-growth fiscal policy.

  Even better, it seems that Bush and Bernanke are on the same pro-growth side. During his hearings, Bernanke gave the Bush tax cuts credit for the economic recovery. He also pledged to keep basic inflation around 2 percent or less as he narrated a positive view of the economy.

 Bernanke's biggest concern on the inflation front seemed to be a spillover effect from higher energy prices. But that hypothetical thought is being overtaken by events in the energy trading pits, where gasoline prices are plummeting and crude oil has dropped below the $60 dollar a barrel threshold. With energy inventories high, lower prices will pull down inflation rates in the next couple of months.

 Indeed, lower gas prices at the pump are increasing the purchasing power of consumer incomes, which have risen with steadily impressive job gains. This is what the housing pessimists are missing. Any cooling of the home real-estate market and the "cash out" income from that market is being more than offset by the job creation of healthy American businesses, low unemployment and rising incomes. In fact, while the economic pessimists can only cite the effects of warm weather in January, the reality is that the Bush tax-cut incentives continue to propel economic growth.

 Just look at the outsized gains in retail sales, new home construction and manufacturing production. Then look at the flood of new tax collections from the strong economy that has thrown off unexpected federal budget surpluses over the last two months.

 Of course, when it comes to inflation, it's critical that the Fed watch the right indicators, lest it does more policy damage than good.


Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.