Tim Duy on the Fed outlook

Tim Duy, the John Berry of the blogosphere, has his latest Fed outlook up on Mark Thoma's blog: More Fed Volatility. Always thoughtful and balanced. Here's an excerpt:

..I found Bernanke’s testimony yesterday to be remarkably consistent with the last FOMC statement and my interpretation of how the Fed likely views the data. I suspect he put great effort in creating a statement that lacked the appearance of flip-flopping. The economy is slowing, especially when compared to the heated pace of the first quarter. The slowing is mostly concentrated in consumer spending, while investment spending holds strong.

With regard to the slowing, the full impact of previous rate hikes has yet to be felt. With the economy anticipated to slow to potential, inflation pressures are expected to ease as well. The balance of risks remains titled toward inflationary conditions, but the timing of any additional moves is dependent upon incoming data.

If the testimony was indeed consistent with last FOMC statement, why did markets surge yesterday? My interpretation of events is that market participants, like myself, were mentally geared for a more hawkish Ben, and instead the Gentle Ben of the last FOMC statement sauntered up to the stage. The higher than expected reading on core CPI released earlier in the day only enhanced this fear that Bernake would turn hawkish.

My concern is that, although the Bernanke sounded soothing relative to expectations, the incoming data argue for another rate hike in August. Indeed, while Bernanke was sanguine about the growth outlook, he explicitly warned of the risk of inflation...

And, after reading the FOMC Minutes, what is his bottom line?

Bottom line: Bernanke’s testimony should not be viewed as a guarantee of a pause; the data remain the focus at the FOMC. A pause doesn’t mean done.

Comments

[A. PERLA]

"If the testimony was indeed consistent with last FOMC statement, why did markets surge yesterday? My interpretation of events is that market participants, like myself, were mentally geared for a more hawkish Ben, and instead the Gentle Ben of the last FOMC statement sauntered up to the stage."

Gotcha, didn't he?

Equity markets have a VERY positive influence on the "feel good" factor (FDF). The FDF prompts spending, since when portfolio values rise people think less wearily about a sunshine vacation in St. Tropez.

As a resident of France, therefore, I want to commend Ben for his showmanship. (We're having not such a good tourist year, here.) But, it was that, wasn't it - just showmanship?

He borrowed a leaf from Greenspan's book, which he probably has not put down since he first arrived at the Fed. It contains a simple lesson - pay attention to the FDF!

The US used to go through "boom and bust" cycles. Now it is undergoing a "boom and slow-leak" cycle. Growth is not firmly re-established; whilst profits are good (meaning corporate investment is there to support demand). All it needs is for consumer spending to find another venue other than real estate within which to sustain itself.

[christy]

respected sir,

I completely read ur articles sir. i am M.COM. student of holy cross college in trichy, state of tamilnadu . sir i request to want one information that is role or function of managerial economist in ur concern. please did not ommit my request sir.
thank u sir,

[A. PERLA]

"sir i request to want one information that is role or function of managerial economist in ur concern."

If you mean a corporate economist, then it depends very much on the company.

Macroeconomic forecasts are abundant. But specific studies are typically of interest in a corporate context.

Let me give you an example. I began working with a large computer company right out of university. They asked me to forecast the pricing of semiconductor quality silicon to determine input manufacturing costs, as this level of quality was becoming increasingly rare due to heavy demand.

This is typical of the sort of analysis corporate economists are called to do. (IMHO) They are related tightly to corporate business objectives.

Hope this helps.