Wednesday, September 23, 2009

Bernanke maintains credibility with modest Fed statements

Today's commentary from the Fed was as forecast. Traders appeared confused after the 2pm release of the Fed statements, sending the equity markets up sharply after the announcement, stalling out for an hour, and then trading off quickly after that.

The Fed confirmed that a recovery was underway but then pointed out that unemployment levels were still likely to grow, credit availability remains constrained, and real estate stabilization is still not certain. "Is that all good or bad?" traders shouted at each other.

The one bit of news that ultimately may have driven the end of day sell-off was the Fed's statement that they were slowing the purchase of mortgage backed securities in order to insure an orderly transition to normal markets when that part of Fed run stimulus ends early next year. That was the only thing that opened eyes here when the statement was released because I have no clue how much that program has been underpinning the credit markets.

From this perspective the Fed's commentary underscored trends that are benefitting the overall economy but may bedevil the political and social atmosphere. While aggregate numbers may well continue to show the beginning of meaningful growth, more granular numbers will show that a recovery will not, at least at first, have an even distribution. Unemployment will get higher and then eventually settle back to levels that don't look like the good old days and credit availability will stay constrained by more conservative lenders pressured by tighter capital requirements from regulators and more vigilant internal credit controls. Aggregate inflation numbers will stay very modest but at ground level there will be inflation in things that people really must have like fuel, food, education and health care, which will rob purchasing power and keep prices flat or even declining in discretionary spending areas.


Anonymous Kelvin said...

This joyless jobless recovery will not go down well. It's payday for our Madison Avenue culture, spending for today and letting our infrastructure go unrepaired, our manufacturers get lazy, our bankers get sleazy, and our politicians play games, all in the name of material gratification while Xanax deals with the rest.

2:14 PM  

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