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Fed Outlook Much Weaker Than Reported.

  • Written by Syndicated Publisher 44 Comments44 Comments Comments
    November 4, 2011

    fed-revisions-110211-2

    As expected, and as we posted yesterday, Federal Reserve officials took no action in terms of implementing further policy actions to boost the financial markets.

    Instead the opted for the “talk the markets up” approach by making optimistic statements about the underlying strength of the recovery and pointed to success of the recent bond buying program that has been dubbed “Operation Twist”.   The key complication for the Fed, as shown by their continued debate on future actions, is how to meet their dual mandate of creating “full” employment without stoking inflationary pressures.   With inflation running at nearly 4% and unemployment remaining stubbornly high, despite trillions of dollars of injections, their ability to accomplish that task appears to be running short on time and options.

     

    fed-revisions-110211Fed Chairman Ben Bernanke, offered little hope for a pickup in U.S. growth after nearly three years of economic weakness.  He not only admitted that the pace of progress is “likely to be frustratingly slow” but also further reduced estimates for economic growth from 4% growth at the beginning the year and increased estimates for unemployment levels.  Unfortunately, as we have detailed as of late, with unemployment remaining well above levels associated with economic growth, wages declining as inflationary pressures rise combined with a debt deleveraging cycle the real implication is that even the Fed’s revised estimates may still be too high.

    One of the issues that the Fed ran into, as I suspected, is that the uptick in 3rd quarter GDP which was driven primarily by utility spending from an abnormally hot summer.  It is hard to justify a few hundred billion in easing if things are supposedly getting better.   However, the reality is that most likely that particular anomaly in the data will evaporate in the coming months as weakness emerges across the spectrum giving the Fed more flexibility in the future.

    Lastly, we also stated yesterday that we would likely see a “punt” to the White House confirming that the Fed really is out of ammunition to help the economy and the markets.  We were not disappointed as Bernanke believes it is Congress and the White House that should do more to aid the economy.
    In the final assessment we agree with Bernanke when he said that there are “significant downside risks to the economic outlook.  Most notably, concerns about European fiscal and banking issues have contributed to strains in global financial markets which are likely to have adverse effects on confidence and growth.”   Unfortunately, it what Ben is not saying that has us worried.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of Streettalk Live

    lance robertsAfter having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.
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