Tim Duy's Fed Watch

No Clothes

Unless every able American pitches in, Congress and I cannot do the job. Winning our fight against inflation and waste involves total mobilization of America's greatest resources—the brains, the skills, and the willpower of the American people.

"Whip Inflation Now" Speech (October 8, 1974)
President Gerald Rudolph Ford

Falling into deflation is not a significant risk for the United States at this time, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation.

"The Economic Outlook and Monetary Policy" Speech (August 27, 2010)
Federal Reserve Chairman Ben Bernanke

Rereading Federal Reserve Chairman Ben Bernanke's recent speech and measuring it against the incoming data leaves me with a pit in my stomach.  I sense Bernanke reveals in this speech he is the proverbial emperor without clothes, short on policy options but long on hope.  A last ditch attempt to persuade us that as long as we don't believe deflation will be a problem, it will not be a problem.  But he faces the same challenge as did then President Gerald Ford.  All hat and no cattle.  You need to be ready to back up your talk with credible policy options.  While Bernanke outlined possible policy options, reading between the lines makes clear he lacks conviction in the viability of any of those options.  Simply put, Bernanke is not ready to embrace the paradigm shift bold action requires.  

First, it is worth considering the economic context of the policy environment via the lens of July Personal Income and Outlays report.  Real gains fells short of what I believe to be already diminished expectations, with a clearly suboptimal trend in place:

When Bernanke expresses concern for the near term pace of economic growth, he is concerned with failing to track the current path of economic activity, as illustrated by the path of consumption since July of last year.  This already is a substantial lowering of the bar, and appears to be a resignation that previous trends are unattainable.  That is a problem in many respects, the most important of which is that  previous trends were consistent with full employment. The failure to acknowledge the importance of re-achieving the previous path is, in my opinion, an admission of the willingness to accept a protracted period of high unemployment.  This, of course, has been essentially admitted by Bernanke:

Although output growth should be stronger next year, resource slack and unemployment seem likely to decline only slowly. The prospect of high unemployment for a long period of time remains a central concern of policy. Not only does high unemployment, particularly long-term unemployment, impose heavy costs on the unemployed and their families and on society, but it also poses risks to the sustainability of the recovery itself through its effects on households' incomes and confidence.

As I have already commented, if unemployment is a concern, and there is no conflict between the Fed's dual mandate, then why is the Fed waiting for further evidence of disinflation before acting?  Indeed, Scott Sumner saw a line in the sand in Bernanke's speech of a one percent inflation rate.  The most recent PCE data suggests we are perilously close to testing that line already:

Unemployment hovering just south of double digits, while near term inflation is hovering around one percent.  And if that wasn't enough, the threat of near term slowing is all too evident.  The recent spate of regional surveys suggests the much vaunted manufacturing revival is about to end, with the ISM likely to drop below 50 in the next month or two.  The July report on durable goods, which revealed a sharp eight percent drop in new orders for nonair, nondefense capital goods bolsters this prediction.  Moreover, Intel sent up another red flag on the sustainability of consumer spending in the back half of this year.  And I think we all realize that the government's efforts to prop up the housing market are falling short of Washington's expectations.  

If short term interest rates were at five percent, or three percent, or even one percent, policymakers would be falling over themselves to ease further.  Yet at this point the most we get is a commitment to hold policy steady, and even that only grudgingly accepted by some policymakers.  Why so little, despite Bernanke's pleads that he can do more?  Because the Fed is now up against the zero bound, and the available options are of uncertain effectiveness and internally contentious. 

Consider what is the most likely path Bernanke would choose, the expansion of the balance sheet via additional asset purchases:

I believe that additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions. However, the expected benefits of additional stimulus from further expanding the Fed's balance sheet would have to be weighed against potential risks and costs. One risk of further balance sheet expansion arises from the fact that, lacking much experience with this option, we do not have very precise knowledge of the quantitative effect of changes in our holdings on financial conditions. In particular, the impact of securities purchases may depend to some extent on the state of financial markets and the economy; for example, such purchases seem likely to have their largest effects during periods of economic and financial stress, when markets are less liquid and term premiums are unusually high. The possibility that securities purchases would be most effective at times when they are most needed can be viewed as a positive feature of this tool. However, uncertainty about the quantitative effect of securities purchases increases the difficulty of calibrating and communicating policy responses.

Translation:  Asset purchases are effective in times of crisis, but otherwise are fraught with uncertainties that limit their policy viability.  We simply have no idea how to implement policy via asset purchases.  They are a last ditch effort, at best. 

Moreover, to be effective, they likely need to be conducted on a massive scale, especially if the Fed sticks with Treasuries as their main course.  Former Fed staffer Vincent Reinhart, via NPR:

GHARIB: Now just to bring up the subject of tools, Alan Binder as you know a former vice chair of the Fed, wrote an op-ed piece this week saying that the ammunition that the Fed has to fix the economy, they`re running out and what they do have is the weak stuff. Now, Bernanke disagrees. What do you think?

REINHART: OK, so I think Chairman Bernanke probably disagrees on two main counts. One is there`s still communication. The Fed could convey they`re going to keep interest rates low for a very long time. They`ve probably done as much as they can on that front. They maybe could do a little bit more. But that leads to one other option, which is buying stuff, buying Treasury securities. Now, Alan Binder I think, believes that that effect isn`t that great, but the way you get around that is to buy in very large volume. That`s probably also why the Fed is hesitant to act. It feels that when the time comes to do unconventional policy action, it will have to do very large purchases of Treasury securities.

So, the answer is volume.  Interestingly, St. Louis Federal Reserve President James Bullard made some comments on that point.  From Bloomberg:

The Federal Reserve may increase purchases of Treasuries if the U.S. economy weakens further, though any new program should be “disciplined,” St. Louis Federal Reserve President James Bullard said.

“The committee gave a signal that we are ready to move if conditions deteriorate further, which was certainly in line with my thinking,” Bullard said in an interview on CNBC Television today at the Fed’s annual symposium in Jackson Hole, Wyoming. “I want a disciplined program.” ... 

...“If we could still target interest rates, we would make small moves to adjust to the data,” Bullard said. “I think we should do the same with our quantitative easing program.”

Note:  A "disciplined" program with "small moves."  And Bullard is one of the most willing policymakers to pursue additional quantitative easing, yet he offers what is at best a recipe for policy disaster.  Small moves are almost certain to yield very small impact, and will only intensify the growing sense that the Fed is at the end of its rope.

Reinhart also mentions Bernanke's second option, communication, but also notes the Fed has already exhausted that avenue.  Bernanke seems to agree:

A potential drawback of using the FOMC's post-meeting statement to influence market expectations is that, at least without a more comprehensive framework in place, it may be difficult to convey the Committee's policy intentions with sufficient precision and conditionality. 

Translation:  We don’t have a comprehensive framework in place, and we won’t as long as some policymakers believe that the appropriate course of action is to raise interest rates.

Bernanke then dismisses the option of reducing interest on reserves, and gives no ground to Bruce Barlett's suggestion that the Fed think outside the box and actually charge interest on reserves.  The fourth option, that of raising inflation expectations, is simply unthinkable.

In sum, what Bernanke actually said is that yes, there is more that we can do, but really none of it is effective and we do not intend to go there unless things get really, really bad.  How bad?  Your guess is as good as his:

 At this juncture, the Committee has not agreed on specific criteria or triggers for further action...

They haven't even agreed on current action.  Yet we can trust them to counter deflation when they see it. Paul Krugman sees the current situation as a monumental failure of Bernanke to follow his own research:

The sad thing is that policy makers were supposed to know all this. The Fed had studied Japan extensively, and believed that the Bank of Japan could have averted the lost decade if it had reacted very aggressively early on. Larry Summers talked about a Powell doctrine of overwhelming force in the face of crisis. And yet what we actually got was an underpowered response on both the fiscal and the monetary fronts.

As I’ve said before, we — and particularly Summers-san and Bernanke-sama – owe the Japanese an apology.

I think that Bernanke believes that he did in fact follow his own research, and orchestrated what he believed was an overwhelming force.  And that force did help bring the crisis to a close, but fell short of what was necessary to revitalize the economy.  Now that force has been expended, and they have little left in the arsenal. 

The conventional arsenal, that is.  I believe the Fed fundamentally views monetary policy as operating via interest rates, and is loathe to break that view, despite being stuck at the zero bound.  Bernanke on reducing interest on reserves:

Moreover, such an action could disrupt some key financial markets and institutions. Importantly for the Fed's purposes, a further reduction in very short-term interest rates could lead short-term money markets such as the federal funds market to become much less liquid, as near-zero returns might induce many participants and market-makers to exit. In normal times the Fed relies heavily on a well-functioning federal funds market to implement monetary policy, so we would want to be careful not to do permanent damage to that market.

Seriously, millions of people looking for work, for years, according to the Fed's own forecasts, and Bernanke is concerned about permanent damage to the federal funds market?  He can't deal with that problem at full employment?

Finally, note that Bernanke fails to describe what is arguably the most potent weapon remaining.  Buy foreign currency.  Lots of it.  Rather than target interest rates, target a steady, nondiscriminatory depreciation of the Dollar until we can lift rates far from the zero bound.  Or target equity prices.  Or just put cash in bank accounts.    Bernanke thought outside the box when it came to alleviating the crisis on Wall Street.  Time to think outside the box when dealing with Main Street.  

Bottom Line:  Bernanke's speech struck me as anything but reassuring.  He made it clear that the Fed's remaining options were weak and/or less than palatable for policymakers.  With such low ammunition, how can we take seriously his conviction that the Fed will aggressively defend against the threat of deflation that is already upon us?  Simply wait around for the fiscal policy backstop?  Don't hold your breath - this Administration is about to be on the run; they have already dropped the policy ball, and there will not be a second chance.   We already had a lost decade, and another is upon us.

Driving Me Crazy

No time for a long post this afternoon, just a short comment.

Today's speech by Federal Reserve Chairman Ben Bernanke contains one of those little inconsistencies that drives me nuts.  In his assessment of economy:

The prospect of high unemployment for a long period of time remains a central concern of policy. Not only does high unemployment, particularly long-term unemployment, impose heavy costs on the unemployed and their families and on society, but it also poses risks to the sustainability of the recovery itself through its effects on households' incomes and confidence.

I was already beginning to view this as a throw away line, something that Bernanke feels he has to say but doesn't really intend to worry much about.  That sense was reinforced later in his speech: 

Second, regardless of the risks of deflation, the FOMC will do all that it can to ensure continuation of the economic recovery. Consistent with our mandate, the Federal Reserve is committed to promoting growth in employment and reducing resource slack more generally. Because a further significant weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability.

If in the current environment - note that traditionally "current" means "right now" - there is already disinflation and little or no conflict between the dual mandates, then why, why, WHY do we need to wait until conditions deteriorate and risk additional disinflation before monetary policymakers turn to the problem of high unemployment that Bernanke claims distresses him?

If there is no conflict, then there is room to maneuver.  Not later, now.  So either Bernanke actually believes there is a conflict, or his concern about unemployment is disingenuous.  I still don't know which.  

A Bleak View

Deferring to the faltering economy, the Federal Reserve stepped up its policy efforts last week.  Barely.  Almost imperceptibly.  Indeed, it is almost as if the Fed could muster nothing better than throwing a bone to its critics.  Will they throw more bones in the coming months?  In this environment, I suspect the Fed will continue to do more than I expect, but less than is necessary.

 

The few data releases since the FOMC meeting have not been particularly encouraging.  The trade deficit expanded, implying a downward revision to the Q2 GDP numbers.  Initial unemployment claims continue to hover at levels consistent with weak job growth.  University of Michigan consumer sentiment ticked up, but signals that households remain under severe pressure.  Retail sales edged up in July, reinforcing the long standing trend of this recovery - an inability to grow fast enough to reestablish the previous trend:

 

One can argue that the previous trend was unsustainable, driven on the back of a clearly faulted debt-fueled asset bubble dynamic.  But even accepting that hypothesis, that spending was critical to ensuring full employment.  If consumers fall back, some other sector needs to step up to the plate.  Otherwise, the economy will continue to limp along a suboptimal growth path.

 

Will FOMC members continue to accept that path?  Acceptance is dependent on the inflation outlook.  And on that point, the July CPI release, which revealed a slight increase in core inflation, leaves me unsettled.    Given downward nominal wage rigidities, it is not that difficult to imagine an economy stuck significantly below potential output, but with just enough price pressures to sustain a slightly positive inflation rate.  Absent a substantial output decline, would the Fed be inclined to significantly expand quantitative easing in the face of low, but positive, inflation, combined with positive inflation expectations?  Apparently no, as this is a description of the current situation.  More of the same is likely to produce little drips of monetary easing here and there, but it is difficult to see, for example, a commitment to purchase $200 billion of Treasuries each quarter until unemployment stands at  7%.

 

Is dramatic action necessary?  I believe so, which, ironically, brings me to last Friday's speech by arch-hawk Kansas City Federal Reserve President Thomas Hoenig.  Hoenig is stepping up his public criticism of the FOMC, lambasting his colleagues for setting the stage for another financial crisis.  In short, Hoenig sees parallels to the deflation scare of 2003, which prompted the Fed to lower rates to 1%.  Shortly thereafter, economic activity accelerated on the back of the housing bubble.  We all know how that story ended.  In Hoenig's view, this was essentially a repeat of the experience of the late 90's equity bubble and subsequent collapse.  Hoenig concludes that it is important to break the cycle; he suggests dropping the "extended period" language, moving the Federal Funds rate to 1%, pausing, and then make a final move to 2%.  He does not view this as tight policy, but instead accommodative yet firmer policy.  Tough love. 

 

Hoenig's story of policy induced bubbles is certainly not new.  Indeed, the fluctuations in household net worth appear to be intimately related to the business cycle since 1995:

 

We tend to view these asset bubbles as "bad," but I think this pattern also poses an interesting question.  If you remove the asset bubbles, what is left?  It sure looks like nothing more than an economy stuck in a subpar equilibrium.  Perhaps rather than diverting capital from productive investments, capital flowed into asset bubbles due to a lack of investment opportunities.  It is not so far fetched; we know that firms are sitting on nearly two trillion dollars of cash yielding low returns. 

 

In other words, were the asset bubbles critical to maintaining full employment?  And if so, how can we reflate the economy in their absence?  Hoenig believes we will restructure the economy over time, but his story is woefully incomplete:

… then how might GDP and important components perform? Let me start with consumption, which for decades amounted to about 63 percent of GDP. During the boom it rose to 70 percent. It seems reasonable that the consumer will most likely return toward more historical levels relative to GDP and then grow in line with income. If so, the consumer will contribute to growth but is unlikely to intensify its contribution to previously unsustainable levels….

 

…While businesses need to rebalance as well, they are essential to the strength of the recovery. Fortunately, they are in the early stages of doing just that. Profits are improving and corporate balance sheets for the nonfinancial sector are strengthening and are increasingly able to support investment growth as confidence in the economy rebuilds. Also, although credit supply and demand may be an issue impeding the recovery to some extent, a shortage of monetary stimulus is not the issue. There is enormous liquidity in the market, and it can be accessed as conditions improve.

 

Finally, the federal government needs to rebalance its balance sheet as well. Federal and state budget pressures are enormous, and uncertain tax programs surely are a risk to the recovery. This adds harmful uncertainty upon both businesses and consumers. However, while these burdens are a drag on our outlook, they are not new to the U.S. and, by themselves, should not bring our economy down unless they go unaddressed.

It appears Hoenig believes both consumer and government spending are set to become less important to the growth mix.  Yet, he also believes in such an environment, firms will continue to invest in new capital as confidence grows.  But how are we to expect that firms will have any confidence in the absence of a strong consumer outlook or a government backstop?  Indeed, the strains of such a dynamic emerge already.  From Bloomberg:

Weaker-than-forecast sales at Cisco Systems Inc. and International Business Machines Corp. may signal a slowdown in the corporate spending that has led the U.S. recovery.

 

“It’s been business investment, particularly technology, that’s been in the driver’s seat,” said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh. Should equipment spending slow significantly, “unless something else picks up the pace, it means the outlook for the economy is going to be that much dimmer.”

Note too that he conspicuously offers no mention of the external sector - perhaps no surprise given that an external impetus has been noticeably absent during this recovery.  Simply put, if we take consumer, government, and external spending off the table, I don't see any path that leads to Hoenig's promised land.

 

Nor do I see a path to the promised land in the current stance of monetary policy.  Nor do I see a path in what I suspect is the likely path - drips of easing here and there.  Moreover, given the propensity of firms to offshore productive capacity, I am wary that even aggressive easing will stimulate investment activity.  I think the latest trade release clearly show that stronger domestic demand is likely to get translated straight into imports.  The same goes for consumer spending - the recession has ravaged credit ratings, leaving the pool of potential borrowers shriveled.  And even if we can induce households to buy more flat screen TV's, such stimulus is more of a economic boost for the Port of Long Beach than anything else. 

 

So, increasingly I worry the most effective policy paths are less than palatable for policymakers.  And I can't say that I am particularly comfortable with said paths as well.  But, at the risk of oversimplifying channels of monetary transmission, if future quantitative easing is to work, I suspect it needs to flow through one of two channels.  The first is the via an explosion of net worth.  In other words, a fresh asset bubble.   I don't think this will happen spontaneously.  Via financial reform, policymakers  are in the process of injecting enough glue into the financial markets to keep asset bubbles at bay, at least for the time being.  The other channel is via a sharp decline in the value of the Dollar.  Undoubtedly, this would stimulate export and import-competing sectors (I tend to think the latter is actually the most important).  The rest of the world, however, would be likely to lean against such a decline.

 

This is a depressing outlook, as it suggests that even aggressive monetary easing might not be enough unless such easing can be induced to work along one of two channels policymakers will resist.  Indeed, I think it would be most effective if the Fed could eliminate the middleman of Treasury purchases.  Accumulate equities  to drive up net worth and thus sustain consumer spending, enough of which would be spent on nontradables (the beauty of the housing bubble, by the way) that the stimulative effect would remain in the US.  This option, however, is not legally available to the Fed.  But the Fed could accumulate foreign sovereign debt, thereby inducing a decline in the value of the Dollar.  Alas, that option might as well be illegal as well, and it will never happen.  It would be seen as a.) stepping on Treasury's turf, b.) risking retaliatory devaluations, and c.) setting the stage for an actual currency crisis.   

 

Bottom Line:   The Fed took a baby step forward last week.  It is natural to interpret that step as a signal that more easing is coming.  On the surface, however, such an interpretation is premature.  If the economy continues to produce more of the same - steady growth with minimal inflation - policymakers are likely to keep additional policy responses to a minimum, more as an effort to placate critics than to affect meaningful changes to the economic path.  Such meaningful policy might simply be a bridge too far for policymakers, especially if the asset bubbles during the past two business cycles were key to generating full employment.  In such a framework, the Fed would either need to accept, and even support, a fresh asset bubble or a sharp decline in the value of the Dollar.  Neither option looks acceptable at this time.

 

Update: Tim, who is on a camping trip, emails an update (he wrote the post before he left):

 

One could argue that government backed debt is the latest bubble supported by the Fed. But, in the context of the ongoing disruptions in lending channels, at least relative to what is necessary to hold the economy near potential, it is not a particularly effective bubble, absent a more committed fiscal complement.

On the ebb and flow of American life...the summer car camp

Summer Employment All About Demand

 

Casey Mulligan offers a chart of the nonseasonally adjusted teenage employment data as proof that aggregate demand effects are not the dominate factor behind low employment.  It is such a silly analysis that the instinct is to immediately dismiss it without comment.  I see, however, that Greg Mankiw has anointed the Mulligan analysis as an important piece of evidence:

Casey points out that there is a regular surge in teenage employment during the summer months because more teenagers are available to work (that is, the supply of their labor has increased).  That is no surprise: It is normal supply and demand in action.  But if aggregate demand were the main constraint on employment, this increase in supply should not translate into higher employment during deep recessions such as this one.  But it does! 

 It really makes one understand why the public often dismisses academics as out of touch in their ivory towers.  One has to imagine that neither Mulligan nor Mankiw ever held a real summer job.  Nor, apparently, have they looked at any other nonseasonally adjusted data.  Nor do they appear to have much understanding of the basic ebb and flow of US economic activity over the course of the year.

 

Mulligan and Mankiw both look at the seasonal increase in teenage employment during the summer and conclude that of course this should not happen in a period of weak aggregate demand.  Therefore, the hiring must be driven by the sudden influx in teenage employment during the summer.  It seems to entirely escape them that aggregate demand has a very predictable season pattern - a seasonal pattern that exists in a recession or expansion.

 

These seasonal patterns in demand activity are not new.  Indeed, I imagine that if the data existed, we would see the pattern has remained virtually unchanged since the dawn of human existence, as least in parts of the world where seasonal weather patterns govern economic life.  Indeed, it is the reason we have an influx of teenage labor in the summer.  It is a throwback to the days of America's agricultural past, when the DEMAND for additional labor in the summer months necessitated closing schools for the summer.

 

Are these seasonal patterns still evident?  Turn to the NSA retail data series:

 

As sure as the sun rises each day and winter turns to spring, sales spike at the end of the year as the holiday season approaches, collapse at the beginning of the year, rise in the summer, and then decline in the fall.

 

You can set your clock to this trend.  Every retail analyst knows this trend.  Every teenager who has ever held a summer job knows this trend.  And a huge swath of data follows similar trends, albeit usually without the pronounced end of year impact.  Building activity, waste disposal, tourism, you name it, it has a seasonal demand pattern.  I only have to look out my ivory tower to see it - stuff grows faster in the summer, and the city hires crews of teenagers to cut it back.  The pool down the road is open and staffed by teenage lifeguards only in the summer.  Not because the lifeguards are available, but because there is no demand for an outdoor pool most of the year in Eugene. 

 

Aggregate employment data has always followed this trend:

 

Recession or expansion, the demand for labor increases in the summer and winter, following the patterns of demand.  In the summer, some of this demand is satisfied by a seasonal rise in teenage labor supply.  This isn’t exactly brain surgery.

 

Mulligan and Mankiw have not found any smoking gun that refutes Keynesianism.   They do unwittingly reveal that they don't really understand how to use nonseasonally adjusted data.  But, more importantly, they reveals a remarkable ignorance of - and, presumably, lack of appreciation - for the ebb and flow of economic life in America.  It is almost like not understanding basic elements of your own culture.

Trade Deficit Explodes

 

In his recent NYT editorial, US Treasury Secretary Timothy Geithner proclaimed:

Even the surge in imports, which lowered the rate of increase of G.D.P., actually reflects healthy and growing American demand.

I imagine that he must then be thrilled by today's trade report, which revealed the trade deficit swelled by $7.9 billion on the back of an explosion of imports.  Analysts were quick to note that the new figures will contribute to another downward revision to the already disappointing Q2 GDP report:

“The wider-than-expected trade gap points in itself points to a 0.4 percentage point downward revision to GDP growth, which needs to be added to the 0.8 percentage point estimated downward revision coming from construction and inventories. Added together, these revisions at this point suggest second-quarter real GDP growth will barely be above 1% (call it 1.1%–1.2%),” said John Ryding and Conrad DeQuadros at RDQ Economics.

 

Peter Newland of Barclays Capital says that his firm’s tracking estimate for second-quarter GDP is now at just 0.3% growth. Economist Nouriel Roubini  puts the figure at 1.2%.

I think you can argue a trade deficit reflects solid demand growth when the economy is operating near potential, or at least looks headed toward potential.  I think such an analysis is ludicrous when unemployment hovers near double digits.  Clearly, we have unused capacity.  Yet no way to utilize it?  Instead, I think the import surge reflects the deeply embedded structural imbalance in which US demand spending is increasingly satisfied with overseas production.  In essence, you can stimulate domestic demand, but that demand is offset by an increased import bill.  It is, of course, considered crass to suggest the import picture is an impediment to US growth.  At least departing CEA Chair Christina Romer was willing to acknowledge the import picture may be a little important:

A bit of you keeps saying that if only those were American products, think of how high GDP growth would have been.

Indeed.  The import surge, perhaps, is in part temporary.  From Bloomberg:

The expiration of export-tax rebates on some Chinese commodities beginning in July may also cut U.S. imports from China in coming months, helping to narrow the deficit and thus contributing to growth in the third quarter, said Bandholz.

I am not really counting on that story, but one can hope.  Note that in the earlier interview,  Romer shifts quickly to the export story.

People are buying things. Importantly, exports are growing at 10%. We’ve always said that we have a demand problem and that one way to deal with it is to get foreigners to buy more of our products.

 Geithner too is enamored with the potential of export growth:

Exports are booming because American companies are very competitive and lead the world in many high-tech industries

Federal Reserve Chairman Ben Bernanke also places significant weight on the export picture:

At the same time, rising U.S. exports, reflecting the expansion of the global economy and the recovery of world trade, have helped foster growth in the U.S. manufacturing sector.

Unfortunately, all look to be behind the curve on the trend in real exports:

 

Combined trends in exports and imports are simply not supportive of economic growth.  And, given the current state of the global financial architecture, where the US is expected to be the repository of global savings, it is difficult to see how the external sector contributes positively to the recovery. 

Renminbi-Yen-Dollar Collision Course

 

Currency flows are potentially evolving in such a way as to keep international analysts glued to the news cycle.  The story arguably begins with China's decision to allow greater currency flexibility, an event that was greeted by the financial press as a sign of China's economic maturity and a phenomenal win for the US Treasury.  But the story just evolves in new and interesting directions.  From the Wall Street Journal:

A strong yen is giving Tokyo an awful headache. Beijing is adding to the problem. If things get worse, these old rivals could find themselves facing off in global currency markets.

 

China has ramped up its stockpiling of yen this year, snapping up $5.3 billion worth of the currency in June, Japan's Ministry of Finance reported Monday. China has already bought $20 billion worth of yen financial assets this year, almost five times as much as it did in the previous five years combined. That's making the yen even stronger than it otherwise would be.

Interestingly, to the extent that China makes a minor adjustment to the Dollar peg, authorities simply redirect some of those capital flows to Japan.  Note that, arguably, Japan is the least capable of absorbing those flows.  Seriously, Japan is the biggest basket case in the industrialized world (although US policymakers are sprinting to keep up).  The all too predictable outcome, via Bloomberg:

Japan will pay closer attention to movements in the yen, which have been “a little bit one-sided” after the U.S. Federal Reserve announced a plan to boost the world’s biggest economy, Japanese Finance Minister Yoshihiko Noda said.

 

“Excessive and disorderly currency moves are harmful for the stability of the economy,” Noda told reporters in Tokyo today. “We will keep a close watch on the market and pay closer attention to it.”

Noda’s comments signal growing concern among politicians about the risk the yen’s climb toward a 15-year high poses to the export-driven recovery. The yen gained against all 16 major counterparts today as investors bought safer assets on speculation the global economic recovery is slowing.

 

The Fed said yesterday it will maintain its holdings of securities to stop money from draining out of the financial system. Japanese stocks declined, with the benchmark Nikkei 225 Stock Average falling 2.5 percent, after the announcement failed to quell concern a recovery will falter.

And, via Dow Jones:

Japan's Ministry of Economy, Trade and Industry announced Wednesday it will conduct an emergency survey of approximately 200 companies to assess how the recently strong yen has affected their operations, the Nikkei business daily reported on its online edition Wednesday.

 

The news comes as the dollar dropped to a 15-year low against the yen Wednesday at Y84.72, a development that is likely to increase concerns among Japanese exporters. A strong yen makes Japanese products more expensive overseas and eats into revenue sent back to Japan.

The trade ministry's survey will question firms on how the recently strong yen has impacted upon management issues related to exports, as well as sounding out how companies intend to deal with the effects of the strong yen going forward, according to the Nikkei.

And note the global slowdown is weighing on Japan too:

Japan's machinery orders recovered in June, but growth was weaker than expected, suggesting the strong yen, slowing exports and a murky global economic outlook are making Japanese companies more cautious about expanding.

Will Japanese authorities intervene to keep a lid on the Yen's appreciation?  The consensus among analysts is they will not.  Via the New York Times:

Indeed, many analysts do not expect Japan to intervene. To be effective, such intervention requires international coordination; moreover, Tokyo has supported Washington’s efforts to pressure China to let its currency appreciate, as part of a commitment among the world’s largest economies to let market forces determine currency levels.

You see, currency manipulation is considered out of style for everyone but the Chinese authorities.  Japan is expected to continue to play ball with the G-20 stance.  Even if it makes little economic sense  - a good case can be made that the best policy option for at least two nations, the US and Japan, is to easing quantitatively via the purchase of foreign currencies, just not each other's.  (As an aside, I find the obligatory line about the importance of "international coordination" just plain silly.  It seems that China has managed to independently manipulate currency values quite effectively).

 

Now, suppose Japanese officials believe that intervention is required regardless of the G-20.  Presumably, they will give US Treasury Secretary Timothy Geithner a phone call to at least keep him in the loop, if not to receive his implicit consent.  One wonders if Geithner will recognize what he would be consenting to:  Japanese intervention, if it occurs, means that Chinese authorities managed to get Japan to acquire  their Dollar reserves for them.  Instead of buying Dollars, China buys Yen, which in turn induce Japan to buy Dollars.  This maintains the artificial capital flows to the US while allowing China to escape accusations of being a "currency manipulator."

 

By the way, how is that Chinese revaluation going?  Predictably disappointing.  Note this story from Bloomberg:

Chinese policy makers may have extra room to loosen lending curbs and boost investment in coming months after slower growth in retail sales and industrial output signaled ebbing inflation pressures.

July’s 3.3 percent gain in consumer prices, announced by the statistics bureau in Beijing yesterday, may be the peak for the year, according to Nomura Holdings Inc. and Mizuho Securities Asia Ltd.

 

Industrial production expanded at the weakest pace in 11 months in July, highlighting the moderation in growth triggered by government curbs including a 7.5 trillion yuan ($1.1 trillion) lending limit for 2010. Softening export orders show the risk that weakness in overseas demand will drive a deeper slowdown in the world’s third-biggest economy.

 

“Policy makers may have more room to sustain growth if needed,” said Sun Chi, a Hong Kong-based economist at Nomura, who previously worked for the U.S. Treasury in Beijing. “The lending quota could be loosened to sustain ongoing investment projects.”

Recall, one of the reasons to allow the renminbi to appreciate was to keep a lid on inflationary pressures.  But that rationale will be off the table now that inflation has "peaked" and growth is ebbing.  The People's Bank of China is quick to react:

China’s yuan fell the most in seven weeks on speculation policy makers will counter appreciation amid signs of a slowdown in the world’s third-largest economy.

 

The People’s Bank of China today lowered its daily reference rate by 0.36 percent to 6.8015 per dollar, the steepest drop since a dollar peg was scrapped in July 2005, after a gauge of the greenback’s strength jumped the most since 2008. Industrial output rose 13.4 percent from a year earlier in July, the smallest gain in 11 months, and bank lending increased by the least since March, reports showed yesterday.

 

“China’s central bank may be adjusting the pace of appreciation since yesterday’s data wasn’t good,” said Liu Dongliang, a Shenzhen-based analyst at China Merchants Bank Co., the country’s six-largest lender by market value. “It’s also probably due to the dollar’s broader strength.”

Note the reference rate.  Remember where we started?  Bloomberg remembers:

China loosened controls on the yuan’s exchange rate on June 19, after keeping the exchange rate at about 6.83 per dollar for almost two years. The yuan has since strengthened 0.5 percent.

A whopping half a percent, and apparently no more to come given the deteriorating economic outlook.  One wonders, given the exploding US trade deficit, how much longer US officials will tolerate this farce?  Have the imbalances already become too deep, too entrenched, that they can be resolved with nothing short of another financial crisis?  Increasingly, I fear this is true.

Waiting for Nothing?

 

Incoming data give the Fed a green light to ease further.  There is frequent chatter from unnamed sources that the Fed can do more and will consider more at this Tuesday's FOMC meeting.  The public stance of Fed officials is recent weeks has tended to downplay the necessity for action at this juncture.  This combination leaves the outcome of this week's FOMC meeting in doubt.  My baseline expectation is that the FOMC statement acknowledges the weakness in recent data, but leaves the current policy stance intact.  There is a nontrivial possibility that the Fed either implicitly or explicitly ends the policy of  passive balance sheet contraction.  I believe it very unlikely that the Fed sets in motion an expansion of the balance sheet.

 

Much has already been written on the disappointing employment report.  Excluding Census workers, the economy added a decidedly pathetic 12k employees.  Private sector job growth came in at just 71k, while state and local governments shed 48k employees.  While some commentators have highlighted the 630k private sector gain since the beginning of the year, the bulk of that gain - 399k - came in March and April.  Since then, the private sector has added a scant 51k jobs a month.  Enough jobs to be sustainable.  Maybe, although this is even questionable given the decline in temporary help hiring, which may signal even softer numbers in the months ahead.  But even if sustainable, certainly extremely vulnerable to negative shocks. And even if sustainable, the current rate is sure to decrease unemployment only if job seekers continue to exit the labor force.

 

Indeed, the labor force numbers turned south, sending the participation rate down as well.  Although the technical recovery - at least as measured by GDP growth - has been in place for four quarters, participation rates still fall short of year ago levels.  The gains of earlier this year appear to be as ephemeral as Census hiring.  Indeed, it is likely that hiring, not any broader improvement in labor markets, drew people back into the labor force.  Who says the government can't create jobs? 

 

 Not that below trend job growth should be any surprise given the trend in output growth.  The math is easy on this one - the pace of growth has decelerated sharply since the end of 2009.  Job growth is simply following this trend.  Nor is their much hope for a substantial reacceleration.  Factors that supported Q2 growth, especially inventory correction, residential investment, and government spending, are all expected to wane as the year progresses, while consumer spending growth is expected to remain lackluster.  In that environment, it is even doubtful that the solid run of equipment and software gains can be sustained. 

 

In reality, the story is effectively unchanged from four quarters ago.  It has always been the case that meaningful labor market recovery required growth of real final sales of at least three times the numbers we have seen.  That just is not going to happen without substantially more stimulus efforts.

 

Are such efforts forthcoming?  I think that everyone has pretty much written off any possibility of fiscal stimulus coming to the rescue anytime soon.  To be sure, there may be a few billion here, a few billion there that show up, but no one expects any serious effort to, for example, attempt to close the output gap.  Administration efforts have shifted to trying to spin the data as a solid recovery.  Along those lines, we saw US Treasury Secretary Timothy Giethner lift the "Mission Accomplished" move right out of the Bush II Administration's playbook with his NYT editorial, which can be summarized as "growth is positive, we did that, quit whining because you don't have a job."  Simply put, if the Administration is content with the numbers we see, they are effectively content with a sustained, substantial output gap and the associated unemployment.  They must be, as there is no urgency to do more.  The pendulum has shifted.  The Administration must feel it necessary to believe the recovery is sufficient and intact, otherwise they will be accepting the Republican claim that the stimulus package failed.  Moreover, I think they genuinely believe that the deficit needs to be brought under control sooner than later.  This, I think, is the problem of an Administration that is a reload of the Clinton Administration.  They believe Rubinomics will work its magic again, rather than recognize that the today's economic challenges are very different than those of the mid-1990's.

 

With fiscal policy off the table, our last hope is monetary policy.  It seems clear that persistent unemployment tilts the odds towards deflation, but the Fed appears to be like a deer stuck in the headlights.  Like Geithner, Federal Reserve Chairman Ben Bernanke showed no urgency in his speech last week to accelerate the path to achieving the Fed's dual mandate.  Moreover, leadership at the Fed may be as out of touch as that in the Administration.  As Mark Thoma and Dean Baker note, Bernanke expects higher wages to support spending in the months ahead, despite the weak incoming wage data.  Remember - Bernanke gave that speech after having the weekend to dissect the GDP report. 

 

Presumably Bernanke is referring to data such as the following:

 

While Washington appears content with the numbers as long as they are trending in the right direction, I believe the focus should be the gap between where personal income less transfer payments would have been in absence of the recession, and the likely trajectory now.  That trajectory, in my opinion, is clearly subpar.  Enough so that it fills me with an increasing sense of urgency.  This is lost income for Americans.  Income that pays for food and shelter.  Medical care and vacations.  Retirement and college savings.  The costs of failure are immense.

 

Did the July employment report shift the odds toward more easing?  It should, but I believe the most likely scenario is that it merely confirms the Fed's priors - that the pace of labor market improvement will be glacially slow.  They have never expected anything else.  Indeed, to what extent is the data really that different from those expectations.  It seems to me that what is most different is that the upside risk is essentially off the table - the V is not meant to be.  Does the magnitude of the downside risk warrant additional action?  Yes, with the V-shaped recovery off the table, so too are the "risks" of additional easing, notably the risk of higher inflation.  Fed leadership, however, appears to view the downside risks as relatively limited giving the amount of stimulus (expansion of the balance sheet and low interest rates) already in place.  Any more is a venture into the unknown, a trip that is still unwarranted in the absence of economic freefall.

 

That said, despite Fedspeak that appears resistant to further easing, the press has been fueling speculation that more easing - albeit largely symbolic - is imminent.  From where does this chatter emanate, other that unnamed sources?  Perhaps from high ranking staff.  Word on the street is that Fed staff are increasingly frustrated with the lack of action from leadership.  Why exactly is Bernanke showing such deference to the more hawkish elements such as Kansas City Federal Reserve President Thomas Hoenig, Dallas Federal Reserve President Richard Fischer, and Philadelphia Fed President Charles Plosser?  If you seek more easing, you are not alone.  Board staff are increasingly your allies.

Why the lack of additional action?  A set of possible impediments:

 

• As described above, incoming data is not sufficiently different from the Fed's forecast to justify additional action.  This is my primary reason to expect little action from the Fed tomorrow.
• Similarly, additional action requires nonconventional monetary policy, of which the impacts are unknown.  I think one of the potential impacts of concern is possibility that additional easing fuels a new asset bubble, in addition to the specter of inflation.
• Concern that additional easing will be interpreted as deficit monetization, and thereby unhinge inflation expectations.
• Fears that additional easing will trigger a disorderly devaluation of the Dollar.  Of course, this may be what exactly what we need.
• Possibly that more action will be a repudiation of the Administration's claim that the economy in on the mend.

 

That said, the internal and external pressure suggests the possibility for a small change at tomorrow's meeting.  From the Wall Street Journal:

At their policy meeting Tuesday, Fed officials plan to discuss whether to take the small but symbolically important step of reinvesting proceeds from its portfolio of mortgage-backed securities to maintain support for the economy. The weak jobs numbers add to the case for taking action, though officials must assess whether taking even a tiny step could create expectations for larger actions in coming months.

Note the final sentence - the concern that more now is essentially a guarantee for more later.  If the Fed eases more now, with the data largely in line with there already weak forecast, how could officials argue against additional easing later when the data continues to support their forecast?

 

Bottom Line:  The incoming data appears largely consistent with the Fed's priors - especially expectations of glacially slow improvement in the labor market.  Yet the probability of any upside risk to the forecast have diminished markedly.  The V-shaped recovery has not emerged.  The elimination of that upside risk argues for additional easing, but the Fed appears hesitant to do more.  Uncertainty about the effectiveness of additional easing argues against more action, especially given relatively quiescent financial markets and positive, albeit lackluster, growth.  Moreover, any additional action now is essentially a promise to do more later, even if growth remains along its current trajectory.   All of these points argue against additional easing tomorrow, and that remains my baseline scenario.  The case becomes muddied by internal, staff level pressure to do more now, combined with rising expectations of imminent easing given the steady flow of leaks to the press.   This opens the possibility of a small policy adjustment that eliminates that passive reduction of the balance sheet.  Any more is off the table. 

Handicapping the Next FOMC Meeting

The game is on.  The relatively weak data flow in recent weeks, culminating with the clearly subpar GDP report, has combined with rumblings from the Federal Reserve that yes, we can do more.  The net result is growing expectations that additional easing will occur sooner than later.  As early as next week, in fact.  Logically, the story hangs together reasonably well except for one key ingredient - the top dog, Federal Reserve Chairman Ben Bernanke, does not appear overly concerned with the economic outlook.  But the chatter is becoming almost undeniable.  Someone is sourcing the press to believe that a policy change is imminent.  And Fedspeak aside, that source cannot be ignored.

 

Hat tip to Calculated Risk, for seeing this CNBC report today:

Japan's Nomura has become the first investment bank to predict the Federal Reserve will begin to ease monetary policy following the recent slowdown in growth in the world's biggest economy.

 

The deterioration in expectations for growth and inflation argues for an easing of monetary policy, Paul Sheard, the global chief economist at Nomura, wrote in his latest report.

"We expect the Fed to at least stop the passive contraction of its balance sheet," he added.

More than one analyst recognizes the Fed's policy to allowing mortgage assets to mature from the balance sheet (or as they are prepaid) as contractionary.  A small step forward would be to acquire an offsetting amount of Treasuries as mortgages mature, thus at least holding policy steady.  The report continues:

"Perceptions about sustainability are not binary, but lie along an unobservable continuum. A concerned and forward-looking policymaker would presumably take action some time before the economy had irreversibly slipped from sustainability," Sheard wrote.

 

"We now believe that current conditions have moved policymakers into action and that the FOMC will adopt a more accommodative stance at its 10 August meeting," he added.

The Fed is likely to stop shrinking its huge balance sheet for the moment, a subtler form of easing than just buying assets again, according to the research...

 

..."To the extent that the size of the Fed's balance sheet matters, this, in effect, amounts to a gradual tightening of monetary policy. Further shrinkage of its asset holdings now seems inappropriate in light of downside risks to growth," he explained.

 

"We therefore think the committee will return to the explicit language of early 2009, in which it articulated a commitment to 'keep the size of the Federal Reserve's balance sheet at a high level,'" he added.

The idea is pushed even further in today's Wall Street Journal:

 Federal Reserve officials will consider a modest but symbolically important change in the management of their massive securities portfolio when they meet next week to ponder an economy that seems to be losing momentum.

 

The issue: Whether to use cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead. Any change—only four months after the Fed ended its massive bond-buying program—would signal deepening concern about the economic outlook. If the Fed's forecast deteriorates significantly, it could also be a precursor to bigger efforts to pump money into the economy.

This is relatively strong language - strong enough, in fact, to imply that it is already a done deal.  Why source a piece to raise expectations when you know you are going to dissappoint?

 

The basic - and reasonable - argument is that risks are now sufficiently weighted to the downside to justify, in the minds of monetary policymakers, an easier policy stance.  And holding the balance sheet steady could be a middle ground for opposing camps in the FOMC.  Still, while policymakers have shaded down their growth forecasts, they appear relatively at ease with the current level of downside risk.  Bernanke's basic outlook today:

After a precipitous decline in late 2008 and early 2009, the U.S. economy stabilized in the middle of last year and is now expanding at a moderate pace. While the support to economic activity from stimulative fiscal policies and firms' restocking of their inventories will diminish over time, rising demand from households and businesses should help sustain growth. In particular, in the household sector, growth in real consumer spending seems likely to pick up in coming quarters from its recent modest pace, supported by gains in income and improving credit conditions. In the business sector, investment in equipment and software has been increasing rapidly, in part as a result of the deferral of capital outlays during the downturn and the need of many businesses to replace aging equipment. At the same time, rising U.S. exports, reflecting the expansion of the global economy and the recovery of world trade, have helped foster growth in the U.S. manufacturing sector.

Notably, he again highlights his expectation for stronger household spending despite the consumer slowdown evident in the latest GDP report.  In other words, he still anticipates that the private sector will pick up where the public sector leaves off.  He also reiterates the dismal labor market picture:

Importantly, the slow recovery in the labor market and the attendant uncertainty about job prospects are weighing on household confidence and spending. After two years of job losses, private payrolls expanded at an average of about 100,000 per month during the first half of this year, an improvement but still a pace insufficient to reduce the unemployment rate materially. In all likelihood, significant time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009. Moreover, nearly half of the unemployed have been out of work for longer than six months. Long-term unemployment not only imposes exceptional near-term hardships on workers and their families, it also erodes skills and may have long-lasting effects on workers' employment and earnings prospects.

Notice that he offers no reason to believe that he has the power to change the state of the labor market.  He simply takes it as given a depressingly long wait until unemployment rates decline meaningfully.  And as far as long-term unemployment, interesting and worrisome, but not much we can do about it.  As far as disinflation:

Inflation has been low, with consumer prices rising at an average annual rate of about 1 percent in the first half of this year, and we anticipate it will remain subdued over the next couple of years. Slack in labor and product markets has damped wage and price pressures, and rapid productivity increases have helped firms control their production costs. Meanwhile, measures of expected inflation generally have remained stable.  

No mention of further disinflation, just subdued inflation.  And, critically, no concern that inflation expectations have taken a turn to the downside.  I think that such a turn would prompt further action, but in their mind it hasn't happened.

 

In my opinion, Bernanke offers a reasonable optimistic assessment of US growth, optimistic at least compared to those of us worried about a protracted period of weakness.  He just doesn't sound like someone concerned enough to push on the economic gas.

 

And, of course, we also have the ever colorful Dallas Fed President Richard Fischer.  Paul Krugman has the analysis.  In short, Fischer a.) is comfortable with current inflation forecasts, b.) views Administration-induced uncertainty as the chief impediment to economic growth, and c.) is very worried that additional asset purchases would be akin to deficit monetization.  A relatively right-winged approach to policy.  One wonders to what extend Bernanke shares his views.  It is often easy to forget that the Fed chief is a Republican. 

 

At the other end of the scale is the door opened by St. Louis Federal Reserve President James Bullard.  Similar to Fischer, Bullard likes to talk, but at least retains intellectual coherency.  From Bloomberg:

“The U.S. is closer to a Japanese-style outcome today than at any time in recent history,” Bullard said, warning in a research paper released yesterday about the possibility of deflation. “A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.”

 Is this, however, a call for an imminent policy shift?  Bullard continues:

“The most likely possibility from where we sit today is that the recovery will continue through the fall, inflation will start to move up and this issue will all go away,” Bullard said to reporters on a conference call yesterday. “Suppose we get another negative shock, another surprise. We have to be prepared in that event to have a plan in place to do something."

Again, his basic outlook is relatively sanguine.  He is looking for another negative shock.  But how big does that shock need to be?  I don't think we have seen it yet. 

 

Note to that Bullard is laying the groundwork to avoid a discussion on extending or terminating the "extended period" language from the FOMC statement:

“The academics will tell you what you have to do is sort of dump interest-rate targeting and switch to something else,” he said. “In the policy debate, that is not really happening. So we need a sharper departure from interest-rate targeting if we are going to get out of this problem.”

I think this is a good interpretation:

Bullard’s stance aims to bridge the gap between two camps at the Fed, said Vincent Reinhart, a former Fed monetary-affairs director. Bernanke is in one group believing that the path of short-term rates is important, while Kansas City Fed President Thomas Hoenig is among officials uncomfortable with the “extended period pledge,” Reinhart said.

I am not particularly confident, however, that Hoenig will embrace a fresh round of asset purchases, extended period pledge or not.  One point of worry:

Bullard, who has voiced concerns with the extended-period language since early March, said during the call he wanted to spark debate and his preference has been not to dissent.

Is he seeking to spark debate or generate publicity for himself?  If the latter, is he leading us to a premature policy conclusion by so vocally identifying his preferred policy choice?  I admit to being concerned that Bullard is leading market participants to expect more sooner than Bernanke is willing to deliver.  In any event, Bullard is setting the stage for an expansion of quantitative easing.  The most we will get next week is holding steady on the balance sheet. 

 

Bottom Line:   The weak GDP report should, on the margin, push the Fed toward further easing.  But Bernanke's speech today, like his testimony on two weeks ago, did not indicate much of a push at all.  And a credibly sized contingent of policymakers appear to be dead set against additional easing.  On the other side, you see chatter, largely anonymously sourced, about additional easing policies the Fed could pursue.  Is this contingent trying to manipulate expectations to push the Fed  into additional action?  Regardless, a straightforward interpretation is this:  The FOMC has downgraded its growth expectations slightly, and need to lean against that with a small - possibly more symbolic than anything else - shift to hold the balance sheet steady and prevent premature easing  tightening.  It is not clear that we are getting this from publicly available Fedspeak, especially from Bernanke, but the press seems increasingly certain.  Still, any handicapping might simply be premature as we look forward to the Friday's employment report.  A game changer, or just another indication that the economy has settled into a subpar growth path, pretty much what the Fed already expects and is not acting on?

 

Update:  11:37pm

 

I see Bloomberg is running a "hold steady" story:

Federal Reserve policy makers signaled they will probably pass on providing more stimulus at their Aug. 10 meeting and wait to see if signs of weaker economic growth persist.

 

Chairman Ben S. Bernanke told lawmakers in South Carolina yesterday that consumer spending is “likely to pick up” amid a “moderate” expansion. St. Louis Fed President James Bullard said on July 29 that he expects the “recovery will continue through the fall.” Three days earlier, Philadelphia Fed President Charles Plosser said in a Bloomberg News interview that calls for more Fed stimulus “are premature.”

This, I believe, is the correct analysis of the Fedspeak and data flow.  The willingness of someone to source a different story to the Wall Street Journal, however, calls this analysis into question. 

 

Additional update:  Corrected error in last paragraph.