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Posted by Warren Mosler (208.49.176.241) on 20:22:34 11/29/07
> Key line is the Committee will have to judge whether the outlook for the
> economy or the balance of risks has shifted materially. This opens the door
> for changing the balance of risk at the next FOMC meeting (Towards weaker
> gwth in light of expressed concerns on markets). This could mean a cut with
> a changed bias, or no cut and a changed bias (less likely).
yes, agreed, and the inflation risk has elevated as well.
If they are thinking of a discount rate cut to the fed funds rate they
may do it before the meeting to see if it alters the fed funds/libor
spread. If they do that and spreads do come in over year end (the
current cause of higher short term non tsy rates as mentioned in some
of the Fed speeches) that will tilt the balance of risks aways from
'market functioning' risks.
Worth looking at the entire speech, more comments in CAPS:
Chairman Ben S. Bernanke
National and regional economic overview
At the presentation of the Citizen of the Carolinas Award, Charlotte
Chamber of Commerce, Charlotte, North Carolina
November 29, 2007
Good evening. I thank the Charlotte Chamber of Commerce for bestowing
on me this year's Citizen of the Carolinas Award. I deeply appreciate
the honor, and I am grateful for the opportunity it gives me to speak
to you this evening. I am also delighted to be here in Charlotte. My
wife Anna and I are looking forward to visiting family and friends
during our time here in the Queen City.
The focus of my brief remarks this evening will be the Charlotte
region and how the area and the economy have changed since I regularly
visited my grandparents here some four-and-a-half decades ago. First,
though, I would like to share a few thoughts on the U.S. economy and
the considerations that we at the Federal Reserve will be weighing as
we prepare for our policy meeting on December 11, less than two weeks
from now.
The Federal Open Market Committee (FOMC), the monetary policy making
arm of the Federal Reserve System, last met on October 30-31. At that
meeting, the Committee cut its target for the federal funds rate, the
key policy interest rate, by 25 basis points (1/4 of a percentage
point), following a cut of 50 basis points in September. Economic
growth in the period leading up to the October meeting had proven
quite strong, as confirmed by this morning's figures on third-quarter
gross domestic product (GDP). At its meeting, however, Committee
members took the view that tightening credit conditions--the product
of ongoing stresses in financial markets--and some intensification of
the correction in the housing sector were likely to restrain economic
activity going forward.
POTENTIAL 'MARKET FUNCTIONING' RISK
Specifically, growth appeared likely to slow significantly in the
fourth quarter from its rapid third-quarter rate and to remain
sluggish in early 2008. The Committee expected that economic growth
would thereafter gradually return to a pace approaching its long-run
trend as the drag from housing subsided and financial conditions
improved. Inflation was seen as edging down next year, approaching
rates consistent with price stability;
IMPLYING IT'S TOO HIGH NOW.
however, the Committee remained concerned about the possible effects
of higher energy costs and the lower foreign exchange value of the
dollar, especially the risk that they might lead to an increase in the
public's long-term inflation expectations.
YES, WHICH LED TO A DISENTING VOTE AND 6 REGIONAL BANKS NOT WANTING A CUT
How has the economic picture changed in the month since that meeting?
As is often the case, the incoming economic data have been mixed.
THIS IS THE SUM OF THE DATA- NOT CLEARLY WORSE AND NOT CLEARLY WORSE
THAN FORECAST. MY GUESS IS Q4 IS THEIR Q4 FORECAST HAS BEEN REVISED
UP. AND THE CONTINUAL UPWARD REVISIONS OF Q3 AND NOW Q4 HAVE TO BE
INFLUENCING THEIR VIEW OF Q1 FORECASTS AND BEYOND AS WELL.
In the market for residential real estate, indicators of construction
and home sales have continued to be weak. In contrast, the labor
market remained solid in October, with some 130,000 new jobs added to
private-sector payrolls and the unemployment rate remaining at 4.7
percent. Claims for unemployment insurance have drifted up a bit in
recent weeks, although, on average, they have remained at a level
consistent with moderate expansion in employment. We will, of course,
have the labor market report for November next week, and in the coming
days we will continue to draw on anecdotal reports, surveys, and other
sources of information about employment and wages. Continued good
performance by the labor market is important for maintaining the
economic expansion, as growth in earnings helps to underpin household
spending. STRONG EMHASIS ON EMPLOYMENT DATA. IT'S PROBABLY BEEN THE
MOST RELIABLE INDICATOR OVER THE LAST 6 MONTHS. NO ONE COULD
'UNDERSTAND' HOW EMPLOYMENT REMAINED HIGH UNTIL AFTER LATE NUMBERS ON
EXPORTS CAME IN, FOR EXAMPLE.
With respect to household spending, the data received over the past
month have been on the soft side. The Committee will have considerable
additional information on consumer purchases and sentiment to digest
before its next meeting. I expect household income and spending to
continue to grow, but the combination of higher gas prices, the weak
housing market, tighter credit conditions, and declines in stock
prices seem likely to create some headwinds for the consumer in the
months ahead. AND 'ON THE SOFT SIDE' IS NO REASON TO CUT. ESPECIALLY
WITH EXPORTS GROWING RAPIDLY AND SUPPORTING DEMAND AT HIGH LEVELS.
Core inflation--that is, inflation excluding the relatively more
volatile prices of food and energy--has remained moderate.
BUT NOT MODERATED FURTHERE
However, the price of crude oil has continued its rise over the past
month, a rise that will be reflected in gasoline and heating oil
prices and, of course, in the overall inflation rate in the near term.
Moreover, increases in food prices and in the prices of some imported
goods have the potential to put additional pressures on inflation and
inflation expectations.
HE IS STATING DIRECTLY THE INFLATION RISK HAS INCREASED SINCE OCT 31.
The effectiveness of monetary policy depends critically on maintaining
the public's confidence that inflation will be well controlled. We are
accordingly monitoring inflation developments closely.
THEY BELIEVE THEY MUST HAVE CREDIBILITY TO KEEP INFLATION EXPECTATIONS ANCHORED.
The incoming data on economic activity and prices
BOTH. WHICH INCLUDES CPI FORECASTS AVAILABLE BEFORE THE DEC 11 MEETING.
will help to shape the Committee's outlook for the economy; however,
the outlook has also been importantly affected over the past month by
renewed turbulence in financial markets, which has partially reversed
the improvement that occurred in September and October.
PARTIALLY. BEING IN THE MIDDLE WITH ACTIVE TRADING IS PERFECTLY
ACCEPTABLE. THE CONCERN IS SPREADS WILL WIDEN FURTHER/RAPIDLY TO THE
POINT TRADING CEASES AND REAL WORLD LENDING CEASES AS A CONSEQUENCE,
THOUGH THE 'CHANNEL' FOR THIS IS UNCERTAIN, AND MAINSTREAM ECONOMIC
THEORY PROBABLY WOULD SAY IT'S A NATURAL ADJUSTMENT PROCESS THAT
SHOULD BE LEFT ALONE FOR OPTIMAL LONG TERM OUTCOMES. COMMENTS WELCOME
ON THIS POINT, THANKS!
Investors have focused on continued credit losses and write-downs
across a number of financial institutions, prompted in many cases by
credit-rating agencies' downgrades of securities backed by residential
mortgages. The fresh wave of investor concern has contributed in
recent weeks to a decline in equity values, a widening of risk spreads
for many credit products (not only those related to housing), and
increased short-term funding pressures.
ALL A REPRICING OF RISK.
These developments have resulted in a further tightening in financial
conditions, which has the potential to impose additional restraint on
activity in housing markets and in other credit-sensitive sectors.
BUT PERHAPS TO WHERE IT 'SHOULD BE' AS THE FED DID NOT LIKE IT WHEN
RISK WAS PRICED AT 0. WHAT THEY ARE WATCHING CLOSELY IS 'MARKET
FUNCTIONING' AND THE RISK OF SYSTEMIC FAILURE.
Needless to say, the Federal Reserve is following the evolution of
financial conditions carefully, with particular attention to the
question of how strains in financial markets might affect the broader
economy.
AS ABOVE.
In sum, as I have indicated, we will be receiving a good deal of
relevant information in the coming days. In making its policy
decision, the Committee will have to judge whether the outlook for the
economy or the balance of risks has shifted materially.
IMPLYING SO FAR IT HAS NOT.
In doing so, we will take full account of the implications for the
outlook of both the incoming economic data and the ongoing
developments in the financial markets.
Economic forecasting is always difficult, but the current stresses in
financial markets make the uncertainty surrounding the outlook even
greater than usual. We at the Federal Reserve will have to remain
exceptionally alert and flexible as we continue to assess how best to
promote sustainable economic growth and price stability in the United
States.
PERHAPS A REFERENCE TO KOHN'S DISCOUNT RATE DISCUSSION WHERE HE
DISCUSSES ADDRESSING LIQUIDITY VS ADDRESSING THE MACRO ECONOMY, A
DISCUSSION WHICH GOT INTO THE 'STIGMA' ASPECT OF THE DISCOUNT RATE
THAT HE FELT WAS AN OBSTACLE TO LIQUIDITY.
References
Employment Security Commission of North Carolina (2007). "Employment
and Wages by Industry, 1990 to Most Recent,"
www.ncesc.com/lmi/industry/industrymain.asp.
Hills, Thomas D. (2007). "The Rise of Southern Banking and the
Disparities among the States following the Southeastern Regional
Banking Compact (225 KB PDF)," Balance Sheet, vol. 11, pp. 57-104,
http://studentorgs.law.unc.edu/ncbank/balancesheet.
North Carolina Community College System (2006). "Get the Facts,"
press release, July 3,
www.ncccs.cc.nc.us/News_Releases/GetTheFacts.htm.
U.S. Census Bureau (2006). "2005 American Community Survey,"
www.census.gov/acs .
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