Wednesday, July 15, 2009

June FOMC Minutes: Bernanke Running for a Second Term

June's FOMC minutes are out. Clearly Ben Bernanke likes his job. He has outlined Barack Obama's wish list for the economy that could provide him a Reagan-like political sweep in 2012. From the FOMC:

Staff Economic Outlook
In the forecast prepared for the June meeting, the staff revised upward its outlook for economic activity during the remainder of 2009 and for 2010. Consumer spending appeared to have stabilized since the start of the year, sales and starts of new homes were flattening out, and the recent declines in capital spending did not look as severe as those that had occurred around the turn of the year. Recent declines in payroll employment and industrial production, while still sizable, were smaller than those registered earlier in 2009. Household wealth was higher, corporate bond rates had fallen, the value of the dollar was lower, the outlook for foreign activity was better, and financial stress appeared to have eased somewhat more than had been anticipated in the staff forecast prepared for the prior FOMC meeting. The projected boost to aggregate demand from these factors more than offset the negative effects of higher oil prices and mortgage rates. The staff projected that real GDP would decline at a substantially slower rate in the second quarter than it had in the first quarter and then increase in the second half of 2009, though less rapidly than potential output. The staff also revised up its projection for the increase in real GDP in 2010, to a pace above the growth rate of potential GDP. As a consequence, the staff projected that the unemployment rate would rise further in 2009 but would edge down in 2010. Meanwhile, the staff forecast for inflation was marked up. Recent readings on core consumer prices had come in a bit higher than expected; in addition, the rise in energy prices, less-favorable import prices, and the absence of any downward movement in inflation expectations led the staff to raise its medium-term inflation outlook. Nonetheless, the low level of resource utilization was projected to result in an appreciable deceleration in core consumer prices through 2010.

Looking ahead to 2011 and 2012, the staff anticipated that financial markets and institutions would continue to recuperate, monetary policy would remain stimulative, fiscal stimulus would be fading, and inflation expectations would be relatively well anchored. Under such conditions, the staff projected that real GDP would expand at a rate well above that of its potential, that the unemployment rate would decline significantly, and that overall and core personal consumption expenditures inflation would stay low.

DoctoRx here. In addition, Bank of America/Merrill Lynch is running ads saying the recession is over. (And, technically, it might be, but the "official" dater of recessions- NBER- will not date the end of the recession until long after it is judged to have ended. That's how hard it is to call the end of a downturn.) Of course, it might already have entered your mind that BofA also wants to please its masters in Washington, just as Dr. Bernanke just might want to please his most important constituent.

It hardly needs repeating that this is a Federal Reserve and a Chairman that did not see the "recession" coming at all, that minimized the effects of a simple "subprime" lending problem, that saw housing as a long-term bulwark of economic strength, and that as recently as the April meeting underestimated the unemployment problem by about 0.5 percentage points.

Going back farther to the Greenspan era, with Bernanke whispering in the Greenspan ear, this is the same Fed that allegedly saw such a risk of deflation in 2003 that a Fed funds rate of 1% was required, along with a painfully slow rise of that rate over several years to a realistic level. All the while inflation was coming to a slow boil.

In other words, the opinion here is that the opinion at FOMC is, charitably, simply one point of view to be considered along with others. Personally, I think that as is the case in my first profession of medicine, it is wiser to follow the advice of those who got things right diagnostically all along. By that analogy, the doctor under whose care a previously-well patient gets very, very sick for an unexpectedly long time may be at the least the wrong doctor. At the other end of the spectrum, the doctor may be what's called a "double 'oh'" = 00, as in Agent 007: License to kill.

Perhaps it's time for Alan Greenspan to come back. 16 years as Chairman; 2 mild recessions that were definitely not depressions or "Great Recessions". Just kidding! But-- I refuse to join with Barry Ritholtz and many others in making AG the main economic villain. There's much to criticize about Alan Greenspan's Fed, but Dr. Bernanke was in charge long before the economic downturn started. He failed to diagnose it properly and failed to prevent a potentially routine virus from morphing into global double pneumonia. Blaming this complication on the prior doctor is unfair. And forecasting a Goldilocks economy in 2012 is amazing.

In any case, the most political and worst Fed Chairman since G. William Miller has produced a masterful political-economic forecast that was worth, at the least, 100 Dow points. Whether this forecast has any additional value remains to be seen.

Copyright (C) Long Lake LLC 2009

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