“The lags between policy actions and their effects imply that we must be forward-looking, basing our policy choices on the longer-term outlook for both inflation and economic growth. In formulating that outlook, we must take account of the possible future effects of previous policy actions – that is, of policy effects still ‘in the pipeline’.”
-Ben Bernanke’s July 19 semi-annual monetary policy report to Congress
The quote above comes from Paul McCulley’s commentary for August. In it, he hits upon similar notes we made yesterday regarding Mortgage apps, housing and consumer spending. As mortgage rates increase and housing slows, we can expect the impact on consumers to be significant:
The uptake of both the quoted paragraph and the chart above is fairly obvious: Hosuing is already rolling over, and will likely take consumer spending with it. Consider also there is at least 6 months to a year worth of rate hikes whose impact have not yet been fully felt in the economy.
Hence, why Pimco thinks the Fed is done, why the Center for Economic and Policy Research believes the Housing slow down will have wider repercussions, and why NYU’s Nouriel Roubini believes a recession is most likely unavoidable.
The August 8th Fed meeting approaches during what may very well be the turning point in the economy. Corporate profits have been strong, but guidance has been soft; Good numbers do not get rewarded, but bads numbers get punished. Real Estate’s impact on the rest of the economy is impossible to ignore. Defensive sectors in the market — Utilities, Consumer Staples, Insurance, Health Care — are all doing better than the (speculative) alternatives.
With Housing on the wane, I simply do not see evidence that anything else — CapEx spending? Commercial Real Estate? — will step into its place.
Hence, we go back to McCulley: "Central banking is the art and science of decision-making under uncertainty." As the recent data makes clear, we have uncertainty in spades these
days: The economy is slowing, while at the same time inflation
seems to be accelerating at the core.
If not the long sought after pause, at the very least we should expect to hear very different noise from the Fed come August 8th: Either they stop, or they announce their intention to do so.
Don’t Shoot Ben and Don’t Short Bonds
Global Central Bank Focus
Paul McCulley and Andrew Balls | August 2006
Weakening Housing Market Slows Economy
CEPR, July 28, 2006
Why a Fed Pause or Even An Easing Will Not Prevent the Coming U.S. Recession
RGE, Jul 31, 2006
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