It turns out that the fellas in the Fed are a little concerned about the state of the economy, which is probably why they decided to keep interest rates low until mid-2013. Recent data has showed that recovery has been slower than anticipated, with unemployment ticking up over the past couple months. Meanwhile, manufacturing production and consumer spending have been flat over the second quarter.
With everything looking as gloomy as Eeyore (don’t judge – Winnie the Pooh should be called Winnie the bomb!), Fed President Ben Bernanke and his boys decided to downgrade their growth economic forecasts for the next 18 months. This marked the fourth consecutive time that the central bank revised its short-term predictions. For those of you keeping count, this is the longest streak of revisions since 2009! Yikes!
In fact, some members of the Fed are so worried about Uncle Sam’s health that they feel that keeping rates low will not be enough to boost the economy. Sounds like some members are yearning for more stimulus baby!
Now, before you run off and impress the ladies at the bar by telling them that QE3 is a foregone conclusion, you should know that Fed officials also discussed other monetary policy moves that the Fed could make use of.
Aside from additional asset purchases, the Fed also discussed shifting from investing in short-term bonds to longer-term bonds. Such a move (dubbed Operation Twist), would squeeze the spread between short-term and long-term Treasuries, thereby lowering long term rates.
Other tactics that Fed officials were discussing were setting employment or inflation targets to guide interest rates, as well as reducing rates on excess reserves in order to encourage banks to flood the market with more cash.
Whew, that’s certainly a lot to consider before the next FOMC meeting! That’s probably why Big Ben bought more time for his gang by not making any declaring any decision during last week’s Jackson Hole Symposium. He also made September’s FOMC meeting a two-day event from the usual one-day fanfare.
Since the Fed members have more time to hash out different monetary policy options, they will most likely take into consideration the big economic reports that will be released over the next couple of weeks. Here are some of them:
- Non-farm payrolls report
- Core CPI
- Retail sales and manufacturing figures
I have mentioned time and again how the NFP report rocks the forex market, and this month will be no exception. Market analysts say that if the non-farm payrolls report falls below the 75,000 figure in August, then the Fed may have no choice but to launch some form of additional quantitative easing.
One of the biggest reasons why some Fed members oppose extended periods of low rates is due to inflation. A higher-than-expected CPI reading would give FOMC hawks more ammo, which might encourage more dissenters in Bernanke’s team.
Just like inflation, FOMC members will also keep close tabs on manufacturing PMIs and the retail sales report to gauge economic activity. If these reports turn out way weaker than expected, then it could signal the beginning of a double dip recession. Of course, to avoid such a scenario, Bernanke could hop on his helicopter and make it rain cash!
For the meantime, expect more topsy-turvy moves as traders return from the summer session and reestablish their bets. I’ll be sure to keep you posted on any economic developments, but you should do your part and read up as well! Be careful out there!