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Tuesday,
July 15
Posted
11 a.m. Eastern
Bernanke's
Congressional testimony
Federal Reserve
Board Chairman Ben Bernanke
gave his semiannual testimony
on the economy. I'll make this
quick, sparing you the cut-and-paste
of his various comments that
I usually resort to in favor
of some brief comments.
--Bernanke made
it clear that no interest moves,
up or down, appear forthcoming.
He continued to talk tough on
inflation but noted the various
pressures affecting the economy
as increasing the downside risk
to the economy. He even stated
that the FOMC needs time to
monitor incoming information.
Sounds to me like he doesn't
want to paint, or talk, himself
into a corner.
--Bernanke addressed
oil prices at length but he
didn't sound too optimistic
about the ability to talk down
oil prices by tightening the
screws on speculators. He cited
declining oil inventories as
evidence that there is not an
imbalance between supply and
demand, as would be the case
if speculation were driving
the market.
--When asked for
his thoughts on a second stimulus
package, Bernanke pointed out
that the main economic impediment
is the housing market and efforts
to aid the housing market should
be the focus.
Thursday,
July 3
Posted
11:00 a.m. Eastern
Jobs losses
for 6 consecutive months
The monthly employment
report was released this morning,
uncharacteristically on a Thursday
due to the holiday tomorrow.
What it showed was more of the
same -- the economy shedding
jobs. The economy remains 0-for-2008
in the job growth department,
with the economy posting job
losses every month thus far.
That makes six consecutive months
of job losses.
For June, the
initial glance shows a loss
of 62,000 jobs. April was revised
from a loss of 28,000 jobs to
a loss of 67,000 jobs and May
showed a revised 62,000 job
cuts, instead of the 49,000
estimated last month. During
the second quarter, the economy
shed over 60,000 jobs per month.
When will it turn
around? Anyone's guess. But
don't look to the housing market
for the answer. The true villian
of the economy is rising oil
prices. Any relief on this front
would pump life into the economy
quicker than dropping a wilted
leaf into a glass of water.
But the higher prices go (quick
update: oil now at $145 per
barrel), the greater the risk
of a severe recession or outright
depression, rather than the
currently mild recession. And
yes, I do believe we're in recession,
as evidenced by the 6 consecutive
months of job losses.
The housing decline,
which started two years ago,
has certainly had an impact.
But the economy is still growing,
albeit at a slower pace. It
is that continued growth that
is cited by those that assert
we are not in a recession, as
the traditional definition of
recession is two consecutive
quarters of negative economic
growth. But six consecutive
months of job losses is more
than enough to tell me that
we are in, and have been, in
a recession since the beginning
of the year.
The escalation
in oil prices threatens greater
damage to the economy because
it impacts everyone, and to
a greater extent than the housing
market. If you live in a market
where home prices have been
relatively stable, both on the
upside and the downside, and
as a long-time resident in the
home you have a substantial
equity stake, the housing market
has had limited impact on your
well-being. But rising energy
prices mean higher heating oil
costs, higher gasoline costs,
higher costs for travel and
transportation and certainly
higher prices at the supermarket
and at restaurants. And these
price increases don't discriminate.
They impact everyone. In fact,
you could make an argument that
these price increases do discriminate
because of the outsized impact
on senior citizens and lower-income
households. It's that widespread
impact, beyond just gasoline
prices (don't get me on a rant
about people that sit in the
drive-thru lane for 10 minutes
in their SUVs, with the air
conditioning blowing and have
the audacity to complain about
gasoline prices) that is the
primary nemesis of our economy.
Let me know what
you think. Please be concise
and I'll use some of your comments
in an upcoming blog entry.
Have a happy and
safe Fourth of July.
Wednesday,
June 25
Posted
4:00 p.m. Eastern
Fed: Inflation
risks have 'increased'
The Federal Open
Market Committee left rates
unchanged this afternoon (no
surprise) and made it quite
clear that the next move, whenever
it comes, is likely to be up
(again, no surprise).
There were some
notable changes to the Fed statement,
conveying the idea that rates
will eventually move up.
In April, the
Fed said economic activity "remains
weak" but today it was
a much sunnier "continues
to expand, partly reflecting
some firming in household spending."
See what upward revisions to
GDP will do?
The Fed still
expects inflation to moderate
(really?), but rather than saying
"in coming quarters"
they now say "later this
year and next year." Of
course, that won't happen without
some cooperation from oil prices
and the Fed notes the "continued
increases" in energy and
commodity prices and the "elevated
state" of inflation expectations
as adding to the uncertainty.
But the key statement
is this one.
"Although
downside risks to growth remain,
they appear to have diminished
somewhat, and the upside risks
to inflation and inflation expectations
have increased."
What the Fed is
saying is that they're not going
to cut interest rates again
and are inclined to raise interest
rates. But we already knew that.
What we don't know, and what
the Fed didn't say, is when.
I still think it will be awhile.
The Fed's tough talk is the
only tool they can really use
right now.
Posted
8:00 a.m. Eastern
Readers' Fed
comments and questions
While we all wait
for the FOMC announcement this
afternoon, here are some of
the questions and comments from
readers about the Fed. Some
have been edited for brevity.
"Do you
think the Fed will lower interest
rates due to the price of gas?"
Not a chance.
If anything, those higher gasoline
prices could eventually prompt
a Fed rate increase, but it
won't come right away.
"Hi Greg,
You say the Fed doesn't want
to throw ARM holders under the
bus but they seem to have no
trouble throwing savers under
that same bus, running us over,
backing up over us and running
us over again! All the while
telling us that inflation is
low. Why is it that competent
people always have to be shafted
to help the incompetent?"
Just wait for
the housing bailout.
"Interest
rates seem to be rising over
their own accord at least in
the short term. Reducing the
bond prices yet overall all
interest rates are still relatively
low. Is it correct in assuming
the Federal Reserve is standing
by to see the pop in the oil,
which might allow them to take
their hands off the interest
rates "levers of browbeating"
to avoid rate increases in the
fall? If oil prices do fall
by 1/4 to 1/2 per barrel, as
recent energy traders suggest,
would that be similar to flushing
cash back into the economy,
adding strength in the dollar,
and act as greater cushion through
increased purchasing power for
consumers? Do you feel that
interest rates will go up or
down this fall irrespective
of who wins the election?"
Any pronounced
decline in oil prices would
be greeted with a cheer from
the Fed, as this would take
the edge off inflationary pressures
and do some of the Fed's dirty
work for them. It has been said
that higher oil prices act as
a tax on consumers, so a pullback
in prices would certainly redirect
a lot of cash into other discretionary
purchases. This would provide
a nice tailwind to economic
growth because of the velocity
of the money, as one person's
dinner out becomes the waitress's
tips, which becomes her discretionary
purchase and results in a boost
to someone else's income down
the line. And so on and so on.
A sharp pullback
in oil prices would be just
what the doctor ordered for
the economy, but it is impossible
to know which way oil prices
go from here.
I think inflation,
the economy and conditions in
financial markets will have
a far greater bearing on the
level of interest rates than
the election outcome.
Be sure to check
back at Bankrate.com for the
latest news following this afternoon's
Fed announcement.
Monday,
June 23
Posted
8:00 a.m. Eastern
Time for a
Fed reality check
The Federal Open
Market Committee meets Tuesday
and Wednesday and, for the first
time since last September, they
won't cut interest rates. Lately,
the talk has been all about
when the Fed will raise interest
rates, with expectations calling
for a rate hike as soon as August.
But a rate hike is doubtful and that lack of a rate hike at the upcoming Fed
meeting will serve as a reality
check.
The prospects
for Fed interest rate hikes
are rooted in inflation data.
The age-old recipe for combating
inflation is to have the Fed
raise interest rates. But this
isn't your grandfather's inflation
because it isn't due to an overheating
economy or too many dollars
chasing too few goods. This
brand of inflation is instead,
one that is largely the Fed's
own doing and one they have
little power or latitude to
undo in the near future.
This inflation
is one that is being imported
via higher costs for commodities,
most notably oil. Here is where
the Fed's repeated and aggressive
interest rate cuts have played
a significant role by helping
erode the value of the U.S.
dollar. Oil, after all, is priced
in U.S. dollars. But inflation
isn't just a U.S. phenomenon
right now, it is a global phenomenon.
And as a result, the Federal
Reserve isn't the only central
bank looking at eventually boosting
interest rates in response.
The problem is this: The U.S.
economy, the housing market,
and yes even the looming presidential
election all stand as barriers
to the Fed taking action. Our
counterparts overseas, most
notably the European Central
Bank, are more focused on inflation
and don't have economic and
housing environments comparable
to what we're experiencing in
the U.S. So the Europeans may
well get a head start on Ben
Bernanke in actually raising
interest rates, likely bringing
about another round of dollar
depreciation.
So what can the
Fed do? Talk. And that is exactly
what the members of the FOMC
have been doing plenty of, jawboning
aimed at both the dollar and
inflation. The rhetoric has
been kicked into overdrive in
recent weeks and has helped drive
home the point that the Fed
is not inclined to cut interest
rates further.
The transition
that has taken place since the
last FOMC meeting concluded
on April 30 is that we are no
longer in a falling rate environment.
With the Fed moving to the sidelines
and inflation data taking over
the spotlight, Treasury yields
have rebounded mightily from
the lows seen in March and April.
Mortgage rates staged a sharp
run-up while yields on certificates
of deposit have been clawing
their way back to respectability.
But the Fed is not in a position
to hike interest rates any time
soon -- think December at the
earliest -- and that will be
a reality check when their meeting
concludes June 25.
Friday,
June 6
Posted
4:00 p.m. Eastern
Job losses
5 straight months
The employment
report for May was released
this morning and the economy
has a rather inauspicious streak
going, with job losses posted
every month since the beginning
of the year. You might say job
growth is 0-for-2008, to use
the baseball parlance.
Specifically,
payrolls shrunk by 49,000 jobs
in May, with negative revisions
to both April and March. In
April, the economy shed 28,000
jobs and in March the job shrinkage
is now 88,000 (revised from
20,000 and 81,000 losses, respectively).
Hourly earnings increased 0.3
percent which, after inflation
terms, is nada. The unemployment
rate increased to 5.5 percent.
Bernanke sends
clear message: Bernanke
made two speeches earlier this
week, but his remarks Tuesday
validated the widely held belief
that the Fed intends to move
to the sidelines. How long the
Fed stays there remains to be
seen, but don't expect rate
hikes any time soon, even with
all the inflation ugliness.
Why? I see three
reasons. First, the Fed spent
the past nine months ushering
homeowners with adjustable rate
mortgages to safety by drastically
cutting short-term interest
rates. They did so to such an
extent that many homeowners
saw negligible rate resets in
2008, unlike the experience
of their neighbors in 2007.
This has prevented untold additional
foreclosures and, given the
significance of this relief,
the Fed will be unwilling to
throw those same homeowners
back under the bus by raising
interest rates too much, too
soon.
Secondly, the
weakness in the broader economy
and the tenuous improvement
in credit markets provides little
latitude for the Fed to raise
interest rates. And finally,
the looming presidential election
- although it shouldn't factor
into the equation - makes this
a particularly sensitive time
for the Fed to consider any
interest rate increases. Can
you imagine the field day the
candidates would have if the
Fed raised interest rates prior
to the election? One other tidbit:
The decision to appoint Ben
Bernanke to another term as
Chairman of the Fed, or not,
will rest with the winner of
the upcoming election (Bernanke's
term expires in 2010).
Don't get me wrong.
I'm not saying the Fed shouldn't
do whatever is necessary to
tame inflation. (I personally
think they should). But I am
saying that it will be difficult
for them to raise interest rates
anytime soon, even if the inflation
picture gets worse. The Fed
continues to believe that inflation
will moderate on its own, though
you can sense some waffling
in that stance as oil goes higher.
Let's hope they're right.
Fed
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