American Account: Call it moderate, it's still a recovery
Here is the opening for this latest interesting column by Irwin Stelzer for The Sunday Times, UK (subscription registration required for the full article, PDF in Subscriber's Area)
Spare a bit of sympathy for the Federal Reserve Board's monetary policy gurus. They have said they will begin to taper their purchases of bonds and mortgages when the unemployment rate falls to 6.5%. So July's dip from 7.5% to 7.4%, to the lowest rate since December 2008, should edge the Fed closer to reducing its purchase programme. Alas, life is not so simple for the Fed.
The rate dipped, but only 162,000 jobs were created in July, down from 188,000 in June and below the approximate 200,000 average in the first half of the year. Worse, previously reported job creation figures for May and June were revised down by 26,000. What is a poor monetary policy maker to do?
In one sense, these figures burnish the forecasting credentials of Fed chairman Ben Bernanke and his colleagues. Earlier this week, before the latest jobs figures were announced, they concluded their latest meeting by announcing that the economy is no longer expanding at the "moderate" pace they previously thought. Instead, the pace of recovery is merely "modest". If you think that's a distinction without a difference, think again. The "moderate" pace was fast enough to trigger a market sell-off in the belief the Fed's programme of buying bonds and mortgages (known as QE3) to keep interest rates down would be cut sharply and soon. The "modest" pace is slow enough to give bond prices a bit of support and make market-watchers believe the day QE3 will head for dry dock might not be close after all, despite the fact that the Fed did not retreat from hints it might wind down its purchases next month. After all, Bernanke would like to get the process of tapering started before he turns his chair over to the man or woman President Barack Obama picks to head the Fed for the next four years.
David Fuller's view Ben Bernanke and
the Fed may be 'hoist by his petard' in terms of the 6.5% employment target.
Companies are hiring but we are unlikely to see anything like the employment
rates of the 1990s, even when the US economy is stronger. Today, unlike 20 years
ago, the big productivity gains are coming from technology, and it is far cheaper
than a hiring spree.
Wall Street is increasingly susceptible to mean reversion towards its 200-day MAs (see charts below) and these comments by Federal Reserve Bank of Chicago President Charles Evans, quoted by Bloomberg, are relevant.