"Kee" Points with Jim Kee, Ph.D.

Stocks ended the week higher and safe-haven country bond yields rose (prices fell) following the Federal Open Market Committee (FOMC) meeting on Thursday. At that meeting, Fed Chairman Ben Bernanke announced an increase in policy accommodation whereby additional agency mortgage-backed securities would be purchased at a rate of $40 billion per month, with the intention of supporting mortgage markets and putting downward pressure on longer-term rates (Federal Reserve Board of Governors). As Bernanke announced at Jackson Hole, one of the hopes of such a policy is to move market participants into other, non-government debt instruments which should, at the margin, be more attractive to investors than the low-yielding government debt instruments that the Fed is purchasing. That is, by buying government debt and bidding up its price, thus lowering its yield, the now higher yields on non-targeted debt instruments should thereby look more attractive to investors. This “portfolio balance effect” is intended to loosen or free up private credit markets. That’s why Bernanke has called the Fed’s actions in recent years a policy of “credit easing” rather than the misstated “quantitative easing” that the press uses (and that originated with the policy of the Japanese central bank targeting the monetary base there). The Fed’s actions, along with European Central Bank President Mario Draghi’s plan to intervene in European bond markets – and last week’s decision by the German constitutional court to uphold these actions – have lowered risk premiums and led to upward movements in riskier assets around the globe.


The Fed’s actions were consistent with the latest Wall Street Journal Forecasting Survey, which is comprised of some 50 plus panelists. The economists surveyed this month do not expect very many benefits from the Fed’s actions, and they expect both economic growth and inflation to be mediocre over the next two years (WSJ; La Jolla Economics). Jobs expectations are for the creation of around 142,000 new jobs per month over the next 12 months, which would result in unemployment remaining in the 8 percent range for the next several quarters. Forecasts for 3rd quarter GDP improved slightly from 1.78% to 1.85%. I would say that most of the enthusiasm for continued moderate growth comes from housing market data, which has shown consistent improvement over the past year (Wells Fargo Securities).


The Federal Reserve also released its own economic projections (as distinct from the Wall Street Journal Survey noted above). The projections made by the Federal Reserve Board and the FOMC are for real GDP growth between 1.7%- 2.0% for 2012, and 2.5%-3.0% for 2013. Unemployment is expected to remain in the 8%-8.2% range for 2012 and 7.6%-7.9% range for 2013. Inflation is expected to remain below 2% for 2012 and just at 2% for 2013 (that’s the “core” rate, which excludes food and energy). These forecasts and the WSJ survey are all saying the same thing, which is that expectations are for continued lackluster growth in the U.S. Indeed, the FOMC statement itself pointed to “continued expansion at a moderate pace,” and I think it is important to point out that Bernanke’s expectations for recent Fed policy actions are merely to “help make broader financial conditions more accommodative” and to “support continued progress toward maximum employment and price stability.” No silver bullet is implied.