Tension Between Incoming Data and Forecast

Thursday, August 03, 2006 | 07:07 AM

“The lags between policy actions and their effects imply that we must be forward-looking, basing our policy choices on the longer-term outlook for both inflation and economic growth. In formulating that outlook, we must take account of the possible future effects of previous policy actions – that is, of policy effects still ‘in the pipeline’.”   
-Ben Bernanke’s July 19 semi-annual monetary policy report to Congress


The quote above comes from Paul McCulley's commentary for August. In it, he hits upon similar notes we made yesterday regarding Mortgage apps, housing and consumer spending. As mortgage rates increase and housing slows, we can expect the impact on consumers to be significant:



The uptake of both the quoted paragraph and the chart above is fairly obvious: Hosuing is already rolling over, and will likely take consumer spending with it. Consider also there is at least 6 months to a year worth of rate hikes whose impact have not yet been fully felt in the economy.

Hence, why Pimco thinks the Fed is done, why the Center for Economic and Policy Research believes the Housing slow down will have wider repercussions, and why NYU's Nouriel Roubini believes a recession is most likely unavoidable.




The August 8th Fed meeting approaches during what may very well be the turning point in the economy. Corporate profits have been strong, but guidance has been soft; Good numbers do not get rewarded, but bads numbers get punished. Real Estate's impact on the rest of the economy is impossible to ignore. Defensive sectors in the market -- Utilities, Consumer Staples, Insurance, Health Care -- are all doing better than the (speculative) alternatives.

With Housing on the wane, I simply do not see evidence that anything else -- CapEx spending? Commercial Real Estate? -- will step into its place.

Hence, we go back to McCulley: "Central banking is the art and science of decision-making under uncertainty." As the recent data makes clear, we have uncertainty in spades these days: The economy is slowing, while at the same time inflation seems to be accelerating at the core. 

If not the long sought after pause, at the very least we should expect to hear very different noise from the Fed come August 8th:  Either they stop, or they announce their intention to do so.


Don't Shoot Ben and Don't Short Bonds
Global Central Bank Focus
Paul McCulley and Andrew Balls | August 2006

Weakening Housing Market Slows Economy
Dean Baker
CEPR, July 28, 2006

Why a Fed Pause or Even An Easing Will Not Prevent the Coming U.S. Recession
Nouriel Roubini
RGE,  Jul 31, 2006

Thursday, August 03, 2006 | 07:07 AM | Permalink | Comments (24) | TrackBack (0)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post



TrackBack URL for this entry:

Listed below are links to weblogs that reference Tension Between Incoming Data and Forecast:


The BOE had a big surprise for traders in England who discounted the inflation threat and their own housing bubble.

Is there a surprise in store for us on Tuesday?

Posted by: Craig H | Aug 3, 2006 8:17:32 AM

The comments to this entry are closed.

Recent Posts

December 2008
Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      


Complete Archives List



Category Cloud

On the Nightstand

On the Nightstand

 Subscribe in a reader

Get The Big Picture!
Enter your email address:

Read our privacy policy

Essays & Effluvia

The Apprenticed Investor

Apprenticed Investor

About Me

About Me
email me

Favorite Posts

Tools and Feeds

AddThis Social Bookmark Button

Add to Google Reader or Homepage

Subscribe to The Big Picture

Powered by FeedBurner

Add to Technorati Favorites


My Wishlist

Worth Perusing

Worth Perusing

mp3s Spinning

MP3s Spinning

My Photo



Odds & Ends

Site by Moxie Design Studios™