Back in April when I planned my move to the US, August looked like a safe time to be packing boxes and dealing with utility companies. The economy was growing, the Fed seemed set to keep policy on hold for at least a year, and surely nobody would do anything in the heat of the summer anyway? So much for my skills as an economic forecaster.
I’m back to find the Fed reinvesting the proceeds from maturing mortgage-backed securities – after what seems to have been a pretty lively FOMC meeting on the 10th – with no change to the steady decline in the economic data.
What strikes me is how continuously bad the news has been in the last month, with no progress in the labour market, and series such as today’s new home sales still hitting record lows.
In his testimony today Ben Bernanke said that the Fed has not yet decided on its leading option in the event that it has to ease policy further. Mark Thoma asks, why?
After all this time, and after all the calls for the Fed to do more, they don’t even know what the leading options are? Bernanke says they are prepared to do more if conditions warrant it, but if there was a sudden disruption in financial markets tomorrow, they wouldn’t even know which policy option to prefer. I expected better than this from Bernanke and the rest of the Fed.
I don’t think that’s fair. I think the Fed knows exactly what it would do if there was a sudden disruption in financial markets tomorrow: liquidity programmes like those we saw during the crisis and then probably asset purchases if they didn’t work.
I think the Fed is still pondering for a few reasons.
For all the turmoil in the markets over the past month, economists at the top US banks remain reasonably bullish about the future.
The American Bankers Association said its economic advisory committee, chaired by Stuart Hoffman of PNC Financial, believes there will be no “double-dip” recession in the US, which will instead experience a “moderate but solid” recovery with growth of 3 per cent this year and next.
Calling a turning point is tricky, and offers ample room to make oneself look silly.
But I reckon a good indicator is surprise. If pundits expect the continuation of a trend, and are surprised, that suggests either a temporary blip or a reversal. And if there are many such related surprises, evidence strengthens for the reversal.
Well, there is a lot of surprise in this office at the moment. Every day there seems to be a new (negative) data release for the UK or US – and every day I see colleagues raising eyebrows at the size of that surprise. An eyebrow raise, in Britain, is a powerful indicator.
So I’m keeping a list, below, of the latest data releases.