Economics: USA: Volatility continues on stock market, Bernanke still settles for half-warning on inflation trend

MarketWatch Weekly Roundup email newsletter (Mar30,2k7) in its summary of last week continued its coverage of the most recent Fed statement on economic trends, that we noted on the subject of inflation vs slowed growth.

Federal Reserve Chairman Ben Bernanke on Wednesday said he expected the economy to keep growing at a moderate pace and inflation to stay under control. But he also said there was a risk that inflation would be stronger than he currently expected. ...

In the itemized teasers, however, the Roundup repeated its noxious headline of last week: Clear as mud again by restating it in bold as an item headline:

Clear as mud, again

Reiterating comments from last week, Federal Reserve Chairman Ben Bernanke told Congress the central bank expected the economy to keep expanding at a moderate pace with contained inflation. But he warned that the expectation could be wrong and that inflation could turn out to be higher than forecast.

Teasing up the full-length article by MR's lead hand in Washington, we come again to the drum being beaten by Rex Nutting, as the reporter deftly tries to get Bernanke to march to the line preferred by many stock-market economists. "Bernanke sees moderate growth, slower inflation -- FOMC's top priority remains inflation, Fed chief says" (Mar 28, 2007), MarketWatch.

WASHINGTON (MarketWatch) -- Despite heightened risks from the contraction in housing and the slump in manufacturing, the US economy will most likely achieve moderate growth this year with gradually slowing inflation, Federal Reserve Chairman Ben Bernanke said Wednesday.

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"Overall, the economy appears likely to continue to expand at a moderate pace over coming quarters," he said, adding that he doesn't see a recession coming this year.
Growth "probably will stay moderate until the housing situation turns around," Bernanke said.

It's perhaps needless to intersperse here the notation that the US economy, and contemporary mega-capitlaism generally, is based on the norm of economic growth, the maximization of growth in the economy is the norm of economic activity and hence of corporations (with possible exceptions for non-profits of various sizes, and entrepreneur-run small businesses). In contrast to the prevailing norm, the leading reformational Christian economist, Bob Goudzwaard and colleagues have critiqued this very idea of normativity for economic life and theory, claiming we have enuff, bring growth as such way down on the basis of sustainability (thus, a competing norm), and re-order our economic institutions and system to feed, clothe, shelter all the people. and provide clean air and good water in a healthy environment.

Goudzwaard nowadays frames this in terms of the international economic order, which does exist (being required by globalization and free trade) and needs drastic change. I have some problems with this conception of what's normative for the economy and its institutions, but am trying to take Goudzwaard's distinction between norms and goals, especially in regard to the economy--beginning with the national economies of the USA and Canada--seriously, especially in regard to the absolutization of growth.

In short, at present, I'm somewhat at home in worrying about growth slowdown, in feeling better with moderate growth, and quite concerned about rapid growth such as we see today at the extreme in Communist China where a kind of robber-baron and cowboy capitalism has been let loose on its population and the world. It was the combination of the overheated Shanghai Stockmarket and the American false-loans for first-time mortagages that were the chief factors in triggering the recent New York Stockmarket downfall. Bernanke and FOMC surely have their work cut out for them.

At the same time, the core rate of inflation "remains uncomfortably high" but "seems likely to moderate gradually over time," he said.

The Fed is likely to keep its overnight lending target at 5.25%, Bernanke said in his prepared testimony to the congressional Joint Economic Committee [of the House and Senate]." The current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation."

US stocks sold off as the central banker began speaking, disappointed that he didn't hint at a quick cut in interest rates. By mid-afternoon, the major indexes were back where they were before Bernanke spoke. Tensions with Iran seemed to play a larger role in market psychology than Bernanke's comments.

This is the key detail of a danger-point in a stockmarket-driven economy, where buyers and sellers await breathlessly for a "hint" from the Fed Chairman in order to determine their next course of action, which when compiled into trend statistics affects all of us in the American economy and elsewhere.

Bernanke continued his itemizations of industrial sectors, including the financial sector and futures markets on various commodities like next season's crops in agriculture and drill yields in petroleum that won't reach markets until after the refining and processing into oil and gas. Futures trading is inherently risking in all industrial sectors where it is needed.

...Treasury[ bonds] sold off, driving yields higher. Futures markets continued to see a 30% to 40% chance of a rate cut by mid-2007.

The dollar fell further against the yen. "Bernanke fails to alter the market's predominant concern," which is housing and weaker growth, wrote Ashraf Laidi, chief foreign-exchange analyst for CMC Markets US.

In his prepared testimony, Bernanke expanded on the Federal Open Market Committee's statement from last week's monetary-policy meeting, during which policymakers held interest rates steady.

Last week's FOMC statement confused the financial markets. At first, the statement seemed to imply the Fed was more likely to ease policy to support growth, rather than leaning toward higher rates to combat inflation.

Gradually, however, prices began to reflect a more balanced view that the Fed had heightened its concerns about both inflation and growth but was still more worried about inflation.

Getting the stockmarket analysts and economics reporters in the media to a consensus around that "more balanced view" was the obstacle to a more proper pricing across the American economy. This is a thorny reality: how instant-trigger economic actionism, especially buying and selling on the stockmarkets, is itself driven by over-reaction of said analysts and media to a careful and truthful statement by the Fed's FOMC led now by Bernanke, to the best of their responsible ability. There is no built in pause for contemplation.

Clearing the air

In response to a question, Bernanke explicitly said the committee didn't change its policy stance and is still focused more on fighting inflation, even though "risks had increased on both sides." He said [FOMC] is moving away from giving firm guidance about future rate actions.

'Despite the recent weak readings, we expect business investment in equipment and software to grow at a moderate pace this year.' — Ben Bernanke, Federal Reserve chairman

The Fed's baseline scenario sees inflation rates falling. He noted that higher rents had been a major factor in the acceleration of core inflation, something he expects to dissipate as the housing market corrects.

"It is encouraging that inflation expectations appear to be contained," he said.

"Bernanke's prepared text contained nothing new regarding the Fed's inflation objective," wrote David Greenlaw, economist for Morgan Stanley.

Most of Wednesday's testimony concerned the prospects for growth in the wake of the sudden weakening of the subprime mortgage industry.

Housing woes

"Thus far, the weakness in housing and in some parts of manufacturing does not appear to have spilled over to any significant extent to other sectors of the economy," Bernanke said. The Fed chief identified several downside risks to his benign outlook, including what he called the "substantial correction in housing," which could lead to severe financial problems for many individuals.

"The implications for these developments for the housing market as a whole are less clear," he said. "The impact on the broader economy and financial markets of the problems in the subprime [housing] market seems likely to be contained."

In response to a question from Sen. Charles Schumer, D-N.Y., Bernanke said it would be "worth looking at" a federal predatory-lending law. Bernanke noted that financial regulation in the United States is divided among many federal and state agencies.

But he defended the Fed's hands-off approach to the lending business, saying overbroad rules could "kill" the market.

Here I would tend to think a Fed law against predatory lending is in order, but there's huge note of auxiliary issues that flow from making it more difficult for first-time home-owners to get the mortagages they need and, at the same time, have real good prospects of being able to pay-off on a monthly basis. Predatory lending cannot be solved without a national home-owners policy, and that relates to the persistent problems of unemployment.

A slowing in capital spending is another risk, heightened by the February durable-goods orders report, released earlier Wednesday, that showed further slowing in capital equipment orders.

"Despite the recent weak readings, we expect business investment in equipment and software to grow at a moderate pace this year," he said.

"Bernanke appears to be in denial," said Ian Shepherdson, chief US economist for High Frequency Economics, who said manufacturing is in recession. "There is plenty of room for the Fed to do much more than the market thinks, once they get over their usual late-cycle inflation hangups and focus on the fact that the economy is grinding to a halt."

For his part, Bernanke said there are also reasons to think growth might accelerate. "Consumer spending -- which has proved quite resilient despite the housing downturn and increases in energy prices -- might continue to grow at a brisk pace, stimulating a more-rapid economic expansion than we currently anticipate," Bernanke said. Exports are also an area of growth.

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Rex Nutting is Washington bureau chief of MarketWatch. Bolds, underlines, minor deletions and intersperses are mine. -- Economix

In a week's time, while Nutting maintained his slant judiciously, the headline writer for MR moved from "Clear as mud" last week, repeating it "Clear as mud again" this week in the teaser, to the subhead "Clears the air." But the fact is that Bernanke has remained unchanged, while his explication of the nuances on the situation, sector by sector, has been elaborated. That's good and proper. The only trouble3 is that economists for the stock-brokers' analysts and corporations are yammering for hardedge "clarity" where "softedge" is truer given the limits of human knowledge to predict economic trends and unanticible shifts in specific factors.

Of course, I'm not putting down Rex Nutting, whom I regard as just about the best reporter on overall trends in the US economy, with contacts both in the government economic agencies like the Fed and in Congressional finance committees, as well as in the corporate interests, not least among the economists who work for them and often are them. Nutting is immersed in this guild, as are most reports in his specialty and all others.
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Cross-posted from BizMix -- reformational Christian business reportage, comments, critiques, and advocacy

Economics: USA: Bernanke-led Fed Reserve signal 'clear as mud,' says MarketWatch

Weekly Roundup of MarketWatch's email newsletter (Mar23,2k7) underscores a semantic battle that has broken out among close monitors of Federal Reserve statements, especially now that the dean of previous FR chairmen, Alan Greenspan is officially out of the picture, and statements come from a board thru FR's present chairman Ben S. Bernanke, Federal Open Market Committee. Says MarketWatch's weekend roundup,

As expected, the Federal Reserve left official U.S. interest rates unchanged at the end of its policy-setting meeting Wednesday. While the Fed left rates alone, it tweaked the statement released with its decision [,] to suggest to some that it was giving up on future rate hikes. That interpretation drove stocks to big gains shortly after the statement was issued. By Thursday, the enthusiasm had cooled, as analysts and investors reassessed what the central bank had meant to say.

Note MR's own misleading phraseology: "released with its decision to suggest to some." Lacking commas, the sentence itself, written by some careless journalist suggests the FR statement intended its thawt to be interpreted one way by some, another way by others. Duplicity is thus inadvertantly, I presume, attributed to the FR/FOMC statement. Sloppy is closer to the truth in regard to the journalist's write-up. The Fed didn't "suggest to some." Rather, some wanted somethng more (or less) than FOMC had in its collective mind. The analysts resisted nuance, they wanted clear marching-orders type of clarity now. The Fed didn't choose to give them any. It didn't tell them whether to buy or sell, but to take a nuanced look at a changing, even sometimes volatile, economic situation.

What is the semantic quarrel now going-on among stock-market analysts and political economists? Economic Times (India) "Bernanke's policy befuddles Wall St economists" (Mar27,2k7) perhaps sums it up best:

NEW YORK: Wall Street is finding that Federal Reserve chairman Ben S Bernanke’s effort to be transparent doesn’t translate into clarity [but, again, of a certain sort-P].

Treasuries rallied on March 21 after the Fed in its latest policy statement deleted language perceived as biased toward higher interest rates. The gains proved fleeting the following day when no consensus view emerged and, instead, Wall Street’s biggest securities firms disagreed over whether the Fed will lower rates as Merrill Lynch predicted, or raise them as Bear Stearns warned its customers.

Another key analysis came earlier last week from Capitol Reports by MR's Rex Nutting, "Did the Fed change anything?--Analysis: Did Bernanke move to neutral, or just flub his communications?" (Mar21,2k7)

U.S. stock markets rallied late Wednesday after the Federal Open Market Committee released its policy statement, with [some] strategists pointing to a change in one sentence in the statement as a signal that the Fed is no longer predisposed to raising rates.

But the rally didn't hold steady over the next several days. In the meantime, another interpretation of the Bernanke / FR / FOMC gathered more strength.

And it's only a slight leap of the imagination to go from a Fed that's completely neutral about where rates are likely to go next to a Fed that's aggressively cutting rates. Nothing would please investors more than lower rates.

But did the Fed actually signal a change in its policy? Is the Fed now neutral about where interest rates are going? Opinions are "mixed," as the Fed likes to say.

Some analysts said that, in response to the weakening of the economy and specifically to the meltdown in the subprime mortgage market, the Fed had effectively removed its "bias" toward tightening monetary policy. The Fed intended to send a signal that help is on the way, and the markets rallied.

Nutting goes on to supply the obvious correction to the over-optimistic and total-neutrality interpretations, quoting Neal Soss, chief U.S. economist for Credit Suisse, then he shifts over to end-up blaming the Bernanke team for "bad communication."

"It's not a totally neutral posture," Soss continued, "It's 'bias lite' [in favour of acting foremost against inflation]."

But others say the committee flubbed its communication. In this view, FOMC is still fixated on inflation as the main risk, even as it acknowledged that risks of a severe slowdown are growing. Some members of the committee had argued in the past for a more neutral statement, one that mentioned the possibility of rate cuts as well as rate hikes, so this could just be a bone thrown to a small minority on the committee. If that's so, then the Fed got too cute in its wording, and markets misinterpreted the changes as a sign of a significant switch in policy.

"The new statement certainly marks a baby step toward the easing that so many market participants expect later this year, but we would view it as a modest concession to doves that is unlikely to mean much going forward," wrote Stephen Stanley, chief economist for RBS Greenwich Capital.

It seems to me that Bernanke and FOMC said exactly what they meant and that the analysts on both sides of the semantic quarrel are projecting onto the statement what they would like or would not like to hear.

In short, the immediately foremost problem continues to be inflation, but not such that it requires a raise in interest rates at the moment; rather, the economy is slowing down every so slowly, to the extent that raising rates would contribute to the slowly-already-occurring slowdown. To head-off that eventuality, it may be necessary soon enuff to lower interest rates and allow easier loaning. It was the cheap, easy, and unwarranted loans on mortgages by lenders all too ready to foreclose on hapless home-owners not able to meet their obligations, that made the US markets vulnerable to the Shanghai Flu. But that's another story.