On a day that saw the Dow Jones Industrial Average reach its highest close since June 5 (nearly three years/see chart) and yet the sector which is most responsible for the Great Recession—housing—continues to exhibit weakness, all the talk is on tomorrow’s first ever Fed Chairman press conference following the Federal Open Market’s Committee (FOMC) meeting.
No surprise here: in its meeting today, the Federal Open Market Committee held the Fed funds rate at 0 to 0.25%. The Fed also said the pace of economic recovery is likely to only be moderate for the time being, citing weakness in employment, depressed housing numbers and sinking growth abroad. “Financial conditions have become less supportive of economic growth on balance,” the statement said.
At the risk of sounding like the black cloud in the room, I am amazed at what I am reading regarding yesterday’s Federal Reserve’s statement following its April Federal Open Markets Committee (FOMC) meeting.
We noted here yesterday how we were a little confused with the positive response to the poor Gross Domestic Product report showing back to back quarterly GDP declines of greater than 6% for the first time in more than 50 years.
Then yesterday afternoon the Fed released its statement. The Fed kept the target Fed Funds rate between zero and 0.25% and noted they would continue buying debt at the levels set at its previous meeting (some had expected/hoped they would increase purchases of Treasuries).
Reading the minutes from a Federal Reserve Open Markets Committee (FOMC) meeting can be frustrating and downright painful. The committee literally has dozens of hands and keeps on looking at another.
A newswire story citing a minor shift towards concern over slow economic growth from inflation caused me to look at the release closely.
I guess it was there somewhere but darned if I could find it. It is odd that they would abandon their shift from inflation after only just discovering it despite it being apparent for quite some time. But as Economist John Williams noted in the July issue of Futures, “The Fed is not concerned with inflation. It is not concerned about the economy…its primary function is keeping the banking system solvent.”
With all the debate over whether or not we are in a recession or whether or not the worst of the housing and credit crises is behind us, it may be best to ignore the talking heads and look at the data. Unfortunately the data is not good.
Tuesday we where hit with record poor housing numbers and a continued decline in consumer confidence. The S&P Case-Shiller Home Price Index for March showed “continued broad based declines in the prices of existing single family homes across the United States.”
The minutes of the April meeting of the Federal Reserve’s Federal Open Markets Committee (FOMC) were released yesterday. They reflected the Fed’s view that the economy would continue to weaken and contained amended projections of much higher inflation as well as slower growth.
All of the Fed’s weaker economic projections stopped just short of declaring that we are in or are headed into a recession. But the dubious use of core Consumer Price Index (CPI) inflation measures that exclude food and energy as opposed to the broader measure as the deflator in Gross Domestic Product (GDP) calculations is the difference between whether we are technically in a recession or not. So I guess those of us who do not eat or use energy are not in recession, the rest of us are.
Based on the Fed Funds futures traded at the Chicago Board of Trade, the market forecasts that the Federal Open Markets Committee (FOMC) of the Federal Reserve will cut the Fed funds rate 25 basis points to 2% at its April meeting, which concludes on April 30.
Based on the prices of distant Fed Funds contracts, this will be the last rate cut of the current easing cycle and the Fed will begin tightening rates beginning with a quarter percent increase back to 2.25% at the meeting ending on Oct. 29 or at the December meeting.
Everyone is expecting the Federal Open Markets Committee (FOMC) to come in later today with a significant cut in the Fed Funds rate following its March meeting. Estimates in the general business media range from 50 basis points to 100 basis points, a full 1% pushing the rate from 3% to 2%. That would leave the Fed with very few bullets and continue to ignore disturbing inflation data.
That the Federal Reserve Bank lowered the Fed funds and discount window rates this morning is old news; but now UBS has officially changed its outlook today and is predicting a U.S. recession.
“The ball started rolling with the recession-like rise in unemployment in December,” says Jim O’Sullivan, UBS chief U.S. economist, adding that last month’s decline in the CEO confidence index, combined with a slipping stock market and weak jobs report have tipped the balance. “It’s just the sense that businesses and consumers are getting more cautious. And the down turn in housing is starting to feed on itself,” he says, adding that he anticipates recovery in the second half of 2008.
