Tuesday, August 10, 2010

Why Would The Fed Act Today?

In light of the poor productivity report issued this morning, an even greater amount of focus is on today's FOMC meeting. The politically propitious time for the Fed to act would be today, but it likely won't. Here's why:

With rates zero bound, some are hoping that the Fed will take further quantitative easing steps (a so called QE2) to help prevent a clearly decelerating US economy from decelerating right into a recession. Yet, one data point does not a trend make. Clearly, the US economy is decelerating. Macro economic data issued since mid May have been consistently coming in BELOW consensus expectations. Yet, not all the data is pointing south (see ISM reports issued last week), and most that do tend to disappoint modestly. Therefore, it is more than a stretch to conclude at this time that deceleration will inevitably lead to recession. Certainly, global growth data does not support such a negatively certain outcome. Moreover, this morning Economic Cycle Research Institute managing director (and recent Beyond the Sound Bite guest), Laksman Achuthan, stated that their data does not conclude a recessionary outcome.

Then you have the feedback from the financial markets, which have sent a fairly sanguine signal this summer re the current and future economic climate. Lastly, we have the political dimension in all this.

If the Fed were going to act, now would be the politically appropriate time as the next meeting will be much too close to the mid term elections and would be almost certainly perceived as politically motivated. Yet, in light of the Treasury Secretary Geithner's recent NY Times "Welcome to the Recovery" op-ed piece along with the Obama administration's self-described "summer of recovery" road show, an act of further monetary accommodation by the Fed today would send a signal of confusion and lack of coordination between the key branches of government. Obama and company say yippee, while Bernanke says uh oh?

Given these factors the question becomes, "Why would the Fed act today?"

No comments: