Bernanke at Jackson Hole
Bernanke's speech this morning. He says the economy sucks, but the fed's on the case. Market indicators of inflation expectations rose, stocks were up, bonds tanked.
Inventory accumulation and the trade balance were substantially downgraded from the first estimate; spending on services and nondurables was revised upward slightly, but the headline number is down quite a bit.
|II 07||III 07||IV 07||I 08||II 08||III 08||IV 08||I 09||II 09||III 09||IV 09||I 10||II 10|
|Gross domestic product||3.2||2.3||2.9||-.7||.6||-4.0||-6.8||-4.9||-.7||1.6||5.0||3.7||1.6|
|Change in private inventories||.90||-.28||-.77||-.49||-.48||-.12||-2.31||-1.09||-1.03||1.10||2.83||2.64||.63|
|Net exports of goods and services||.01||.87||3.21||.84||1.04||-.63||1.50||2.88||1.47||-1.37||1.90||-.31||-3.37|
ProPublica found 85 instances during 2006 and 2007 in which two CDOs bought pieces of each other’s unsold inventory. These trades, which involved $107 billion worth of CDOs, underscore the extent to which the market lacked real buyers.ProPublica, þ Felix Salmon, who says $107 billion was 20% of the market for CDOs. I can imagine this being done for legitimate reasons, but that's not one's natural first bet. It reminds me a bit of the late eighties stock bubble in Japan, in which corporate profits (and the stock market) continued to rise for two years after operating profits peaked, just because of the extensive cross-holding of each other's shares by publicly traded companies. That latter example is more reminiscent than the newer one of an even older incident involving a fellow named Charles Ponzi.
Existing home sales were expected to be lower in July, after the expiration of the home-buying tax credit, but were even lower than expected.
Those charts could be considered misleading - Indiviglio refers to "[t]hat tiny bar to the far right" in one chart, and the bar wouldn't be quite so tiny if the chart started at 0 - but they do show recent home sales at a glance and raise the question: how much of the demand moved forward by the credit was moved from July and how much of the hangover is left to be seen?
Link via Megan McArdle, who mentions anecdotal evidence that buyers overreacted to the credit.
The FOMC statement, as revised:
Information received since the Federal Open Market Committee met in
April suggests that the economic recovery is proceeding and that the labor market is improving graduallyJune indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantlyis rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a timemore modest in the near term than had been anticipated.
Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. WithMeasures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.
Voting against the policy
actionwas Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee's flexibility to begin raising rates modestlyand limits the Committee's ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve's holdings of longer-term securities at their current level was required to support a return to the Committee's policy objectives.
For a third consecutive month, falling energy prices were the prime culprit in producing a negative headline PCE inflation rate—abetted this time around by declines in the price index for food. That string of consecutive negative headline rates looks to be snapped, however, when data for July come out. Meanwhile, the 12-month inflation rate for core PCE ticked down a notch, from 1.5 percent in May to 1.4 percent in June. The 12-month trimmed mean PCE inflation rate held steady at 1 percent.From the Dallas Fed. Overall PCE inflation was a -1.7% annual rate last month, but is still positive over the last year; the core measures are a bit higher, with the trimmed-mean fairly steady in the 0.7-0.8% range recently.