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Fed’s Outlook Much Weaker Than Reported

Written by admin | Nov, 2, 2012

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As expected, and as we posted yesterday, Federal Reserve officials took no action in terms of implementing further policy actions to boost the financial markets. 

Instead the opted for the “talk the markets up” approach by making optimistic statements about the underlying strength of the recovery and pointed to success of the recent bond buying program that has been dubbed “Operation Twist”.   The key complication for the Fed, as shown by their continued debate on future actions, is how to meet their dual mandate of creating “full” employment without stoking inflationary pressures.   With inflation running at nearly 4% and unemployment remaining stubbornly high, despite trillions of dollars of injections, their ability to accomplish that task appears to be running short on time and options.

fed-revisions-110211Fed Chairman Ben Bernanke, offered little hope for a pickup in U.S. growth after nearly three years of economic weakness.  He not only admitted that the pace of progress is “likely to be frustratingly slow” but also further reduced estimates for economic growth from 4% growth at the beginning the year and increased estimates for unemployment levels.  Unfortunately, as we have detailed as of late, with unemployment remaining well above levels associated with economic growth, wages declining as inflationary pressures rise combined with a debt deleveraging cycle the real implication is that even the Fed’s revised estimates may still be too high.

One of the issues that the Fed ran into, as I suspected, is that the uptick in 3rd quarter GDP which was driven primarily by utility spending from an abnormally hot summer.  It is hard to justify a few hundred billion in easing if things are supposedly getting better.   However, the reality is that most likely that particular anomaly in the data will evaporate in the coming months as weakness emerges across the spectrum giving the Fed more flexibility in the future.

Lastly, we also stated yesterday that we would likely see a “punt” to the White House confirming that the Fed really is out of ammunition to help the economy and the markets.  We were not disappointed as Bernanke believes it is Congress and the White House that should do more to aid the economy.

In the final assessment we agree with Bernanke when he said that there are “significant downside risks to the economic outlook.  Most notably, concerns about European fiscal and banking issues have contributed to strains in global financial markets which are likely to have adverse effects on confidence and growth.”   Unfortunately, it what Ben is not saying that has us worried.

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