the topic “Recent Fed Action.” Following are my notes from the conference in hopes that they help provide perspective on the daily market gyrations, panicky newspaper headlines -- and calm jittery nerves.
I tried to capture all this accurately, but sorry if I've made any errors.
“Recent Fed Action” Wednesday, January 23, 2008 4:00-4:45 PM Eastern
Speakers:
Michael Moran, Daiwa Securities America
David Resler, Nomura Securities International
Chris Varvares, Macroeconomic Advisers, moderator
Consider that Fed cut discount rate 75 basis points on Tuesday (now is 3.5%)...
What's the context of this action and what's going to happen?
- Must consider the motivations, stock markets melting down is obvious, general principles important to consider for a deeper analysis.
- Bernake bias is "financial accelerator," and this has been the basis of much of his career work and research. When shock to real sector [consider sub-prime mortgages], feeds into financial sector [consider global effects on markets, credit], which feeds back to real sector, creating a circular downturn to the economy that can accelerate decline. This is his sensitivity and the lens that he's watching today's market through.
What's happening now?
- Shock to real sector (real estate) leading to financial sector shock
- 2nd factor -- current status of inflation expecations. Now well behaved TIPS spreads (Treasury Inflation Protected Securities). Fed saw that as a green light to go ahead and be agressive now.
- If tick upward, will change pace of easing of monetary policy from Fed.
- Fed statement -- aggressive, sees little inflation risk
- Expects them to reduce Fed Funds rate by another point by April, 2008.
What about next week? Markets are still very volatile...
Expectations of the markets matter!!! Since expectation of additional easing next week, they may do so to avoid disappointing the financial markets.
Overall, his outlook: He's not optimisitic, but thinks there's a pronounced disconnect between result and financial press coverage. Thinks press is distorting situation. Thinks 1/2 % point growth in 1st half of year, then 2-2 1/2 % in 2nd half. 4 reasons not going into recession:
1) Drag from housing will lessen, but will remain a (-) sector
2) Not excesses in business sector , no overhang, business inventory OK
3) Slow down in import growth will help U.S. economy, shields domestic production with favorable effect on jobs
4) Sees consumer sector slowing, not declining. Acknowledges that this is controversial, not an economists' consensus opinion. But consider the real estate market. As bad as it looks and feels, it's only a 5% drop after a 70% run-up over prior 4 1/2 years. Doesn't think that overall will cut back drastically, except those who did buy at peak will certainly feel more pain.
On the other hand, he's nervous because equity market is declining after real estate, and the combinaton is not good.
Media coverage creating fear may become self fulfilling and depress the market [My comment: I remember this effect vividly just prior to the 2002 market crash.]
Doesn't see a deep seated credit crunch, but there is some softening. Bond market is still moving along, but recent slow volume compared to past two years range. Bank lending is still happening, but slower.
- Agrees mostly. Will dance on edge of recession for 1st half, see few months of reduced industrial production, and slowing consumer spending.
- How big is the hole in credit market, how much will large bank impairment
- Consumer spending, in his 35 yrs in business can't recall another time when so much pessimism about C.S. with so little evidence to back it up. It's true that real retail sales in Q4 was slowest growth in 4-5 years, but certainly not at the level that creates (-) growth. Doesn't forecast outright decline in consumer spending thru 2009.
- So, why Fed changed policy so radically and surprisingly just prior to FOMC mttg? Some think Fed has other info rest of us don't. Not a persuasive argument. Doesn't buy it.
- Fed dares not disappoint the mkt, so may cut further next week. Futures mkt by far is expecting action next week. Quoted market expectation of 96% expect some cut.
- Employment report week from Fri, normally would be preferred course to wait. Now, mkt is so primed for further cut, so they may drop rate to 3% 5 days earlier than employ report anyway.
- Slower growth will probably keep inflation in check
- Thinks OPEC will increase production to drop oil price to maintain market stimulus. It's far more in OPEC's interest to maintain market stability than to keep oil $90-100/barrel.
Neither forecaster was considering stimulus package being proposed by White House and Congress now in his forecasts discussed above -- so those forecasts not dependent upon stimulus.
- Thinks that stimulus package being proposed will bump GDP growth 0.3 point (Dave) Bit more for Mike), not enough to really help the economy but more of a political sop than anything to help the economy. There are select political forces that would benefit the most from this, especially the incumbent party.
- Virtually all growth will be concentrated in the 2-3rd quarters. Will learn 3rd Q result about 5 days before the election...[my comment: hmmm, think of the implications of that!]
Thinks important for Fed to keep eye on inflation -- expects them to back off accomodative policy ASAP if economy better in 2nd half when they think that things getting back on track. Rapid productivity growth in 90's - 2000's kept inflation in check. Now that's slowed and inflation is more of a sensitivity.
