August 14, 2003

The Federal Reserve Speaks

The Federal Reserve speaks:

FRB: Press Release -- FOMC statement -- August 12, 2003: Release Date: August 12, 2003: For immediate release:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 percent.

The Committee continues to believe that an accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period shows that spending is firming, although labor market indicators are mixed. Business pricing power and increases in core consumer prices remain muted.

The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low is likely to be the predominant concern for the foreseeable future. In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Ben S. Bernanke; Susan S. Bies; J. Alfred Broaddus, Jr.; Roger W. Ferguson, Jr.; Edward M. Gramlich; Jack Guynn; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Robert T. Parry; and Jamie B. Stewart, Jr.

Posted by DeLong at August 14, 2003 07:10 AM | TrackBack

Comments

"In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low is likely to be the predominant concern for the foreseeable future."

Posted by: Stan on August 14, 2003 08:03 AM

So, so, so, the yield on the 10 year treasury has risen from 3.11 on June 13 to 4.60 today. This is an astonishingly rapid and pronounced rise in yield. Germany is now in recession, Euroland barely growing, employment in America is very weak, so what does such a rate increase mean and what damage might it cause?

Posted by: anne - fairly balanced on August 14, 2003 08:21 AM

The rate rise at the long end means that bond investors misunderstood the intention of the Fed, as expressed in the May FOMC statement, that both on the way down after the May FOMC meeting and the on the way back up after the misunderstanding was straightened out, hedging by mortgage portfolios exaggerated moves in rates. Mortgages represent a far larger part of the US debt market mix than in any prior business cycle. The result has been much greater volatility as rates turn a corner. As outstanding mortgages are "seasoned", the odds of further sharp declines in rates should be much reduced. Not so lucky in the other direction.

Given that a change in the rate of inflation has been the biggest factor in bringing Treasury yields down since the early 1980s, the odds of a yield rise anything near the decline over the past couple of decades depends on the Fed. Do you think the Fed is going to give up all the gains made against inflation since the early 1980s?

Will higher rates slow the recovery? Of course. They always do.

Posted by: K Harris on August 14, 2003 09:04 AM

And, according to Jesse Eisinger in today's WSJ, sales and earning were weak not strong in the second quarter:

Subj: Not Selling, Not Earning

A battery of Wall Street reports have come out in the past several days debunking the notion that sales and earnings were notably strong in the second quarter.

Sales and earnings in the second quarter were, in fact, weak. They were inflated by the falling dollar, a boost that has nothing to do with management skill or increased demand. Companies continued to cost-cut their way to profits, a process that runs its course.

Wall Street is still playing the game of lowering the bar so that companies may glide over it easily. Dresdner's James Montier estimates that companies only topped earnings estimates for the second quarter by 2% compared with the forecasts made at the end of the first quarter, rather than the 6% we have been hearing about. Worse, he reminds us that investors are looking at pro forma or operating earnings, which overstated true income, or net income, by 60% this quarter. Investors looking at pro forma numbers are "committing financial idolatry," he writes.

Strategists from HSBC last week found that in the second quarter, sales for the S&P 500 excluding financials were up 8%. That appears strong, but is down from 13% in the first quarter....

http://online.wsj.com/article/0,,SB106081312412481100-search,00.html?collection=wsjie%2F30day&vql_string=jesse%3Cin%3E%28article%2Dbody%29

Posted by: Pooh on August 14, 2003 09:14 AM

"As outstanding mortgages are "seasoned", the odds of further sharp declines in rates should be much reduced. Not so lucky in the other direction."

Yes, yes. This is troubling.

Of course, the Fed is not going to raise rates for quite some time. But, inflation bugs are selling the idea of a rate increase to investors. Supposedly the Fed has gone to far with a Keynes/Krugman bias to increase the money supply. The re-flation will work only too well and in-flation will be found. Sell bonds other than inflation protected bonds. Yuch.

So, the Fed appears to have lost some control in the bond market.

So, the rate increase could become a drag on the economy rather quickly. Euro banks may well be selling mortgage debt.

The trigger for the rise in rates appears to have been the Fed shift from the idea that it might buy long term bonds if necessary, to the idea that the Fed Funds rate could be lowered to zero if need be.

Still, GDP growth last quarter was skewed up by the rush of defense spending. That will not be repeated. Weekly jobless claims are a breath under 400,000. Layoff notices are climbing. Wage gains are minimal. All we have now are the child credit tax checks.

Posted by: anne on August 14, 2003 09:25 AM

http://www.wws.princeton.edu/~pkrugman/hyperbol.html

Paul Krugman pointed out a short while ago on the Princeton website that the press had taken to gushing over weak or mediocre economic reports. When I read the reports after the press headlines, I wonder if I can read anymore.

Posted by: jd Fair and Balanced on August 14, 2003 09:49 AM

As for earnings. Please do tell me what Applied Materials is really worth. After all it was selling at about a 200 p/e before another loss this quarter. It is selling at a p/e of 40 by earning for 2004, yes 2004. But, but, but, what are the options worth at Applied Materials?

And they just re-issued the "Intelligent Investor."

Posted by: anne fairly balanced on August 14, 2003 12:52 PM

http://www.nytimes.com/2003/08/14/opinion/14HERB.html

George Akerlof, a 2001 Nobel laureate in economics, bluntly declared on Tuesday that "the Bush fiscal policy is the worst policy in the last 200 years." Speaking at a press conference arranged by the Economic Policy Institute, Mr. Akerlof, a professor at the University of California at Berkeley, said, "Within 10 years, we're going to pay a serious price for such irresponsibility."

Posted by: dahl - today balanced tomorrow ? on August 14, 2003 01:06 PM
Post a comment