Three More U.S. Data Releases

August 16, 2013

The housing and labor productivity reports pose no impediment to apparent FOMC plans to rein back asset purchases as soon as the September policy meeting.  Housing starts bounced 5.9% in July and were 20.9% higher than a year earlier, results that were marginally better than forecast.  Building permits also climbed 2.7%, auguring a continuing uptrend in starts.  Gains in productivity of 0.9% and unit labor costs of 1.4% last quarter also surpassed expectations.

The Reuters/U. Michigan consumer sentiment index for early August, however, fell by 5.1 points to 80.0.  Such was not only significantly weaker than the prior month’s reading but well below scores of 84.1 in June and 84.5 in May.  One has to go back four months to April’s 76.4 to find greater consumer anxiety than now, and the cause of the newfound uneasiness would appear to be confusion related to U.S. monetary policy

  • What does it mean for Fed independence and the future impact of the central bank that the nomination of the next chairperson should, like everything else in the country’s politics, become an object of great contention and lobbying effort?
  • How quickly will quantitative easing be trimmed, and does such constitute a tightening of the policy stance (absolutely so in my opinion)?
  • How much steeper might the U.S. yield curve become?

Of course, the ultimate mystery to be learned is whether the U.S. economy can handle any normalization of monetary policy after an extensive span with an ultra-expansive zero interest rate stance, supplemented by unconventional quantitative stimulus.  The experiences of Japan on repeated occasions and the U.S. after QE1 and QE2 at least raise reasonable doubts about the economy’s tolerance for less accommodative central bank policy.  Japan’s overnight money rate target hasn’t exceeded 0.5% since September 1995 not because Bank of Japan officials didn’t want to reestablish higher levels more quickly but because demand and production didn’t tolerate efforts to lift rates.  In this process, the reaction of the market, often an exaggerated one is crucial. 

One doesn’t have to look away from America’s own experience now and in earlier instances of Fed tightening to see this dynamic at play.  Between January 31, 1994 and July 12, 1994 — an interval of 5-1/2 months — the Fed funds target increased by 75 basis points to 3.75%, but the 10-year Treasury yield jumped 180 bps to 7.43%.  The eventual result of the central bank and magnified private sector-induced tightening of monetary conditions was an abrupt slowdown in U.S. real GDP growth from 4.8% annualized in the first half of 1994 to 3.5% in the second half of the year and then 0.7% in the first half of 1995.  Relapse into recession was barely averted.  In the current episode, the fed funds target hasn’t changed, nor have officials suggested that the onset of an uptrend in the  Fed funds target might begin earlier than 2015, but the mere hint of less forceful quantitative easing has been associated with a 116-basis point jump in the 10-year Treasury yield during the last 3-1/2 months to 2.79%. 

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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