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Members of the Federal Reserve like to think they act pre-emptively. But decision-making is harder when the economy is at a turning point. That’s not only because the economy is so fragile, but also because the data typically give conflicting views of strength. As a result, the Fed intends to look beyond the usual spate of economic reports to guide policy.
Just consider last week’s scrambled data on housing, factories and consumers.
In August, existing home sales unexpectedly fell 2.7%, but new home sales rose 0.7% for the fifth consecutive gain.
Despite the conflicting sales data, the Fed believes the worst is over. In the statement released after its Sept. 22-23 policy meeting, the Fed said, “activity in the housing sector has increased.”
Friday’s news from the durable goods sector was another source of conflict since it clashed with earlier reports that showed a growing factory sector.
Total durable goods orders unexpectedly fell 2.4% in August, and July orders were revised downward. Although much of the drop was in aircraft, the nondefense capital goods sector — seen as a proxy for business investment — showed weakness. New orders fell 0.4%, the second decline in a row, and shipments dropped 1.9%.
Thanks to the weakness in shipments and a continued drop in inventories, Macroeconomic Advisors cut their estimate of third-quarter gross domestic product growth to 2.8% from the 3.3% increase that had prevailed in recent weeks.
Offsetting the drag from the business sector, however, are better consumer attitudes. The final September reading of the consumer sentiment index jumped to 73.5 — the highest reading since January 2008.
Consumers might feel a little happier because regional manufacturing surveys along with the gradual drop in jobless claims suggest that layoffs are easing. But fewer job losses are not the same as job gains. The unemployment rate will keep rising into 2010, putting the pressure on the Fed — especially from politicians — to stay accommodative.
To be sure, given the importance that wage growth has in consumer spending and inflation expectations, the Fed will take into account the labor markets before it makes any monetary decisions. But the employment report — along with other monthly numbers — probably won’t be the main guides for coming shifts in policy.
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If there was every an example of the “Fatal Conceit” it is this article. Based on what facts Ms. Madigan can the Fed know the right course of action? Usually in a predictive “science” the predictions are measured…but when it comes to montrary policy, the more the Fed misses in its predictions the more it is treated with reverence.
Press flat has it right though, inflation is irrelevant to the Fed and the Govt…they don’t care…inflation get in the way with bailout out friends and funding the welfare/warefare state (allowing govt to buy power)…that inflation is the worse from of theft is irrelevant…at least to our overlords…
Why NOT one article on the HR1201 hearings last Friday? Come on WSJ…
The Fed will keep rates low for at least a couple decades…it will take that long for Banks to use carry trades to clean up bad loans i.e. Japan…inflation is just an unfortunate consequence.
Real Time Economics offers exclusive news, analysis and commentary on the economy, Federal Reserve policy and economics. The Wall Street Journal's Phil Izzo and Sudeep Reddy are the lead writers, with contributions from other Journal reporters and editors. Send news items, comments and questions to realtimeeconomics@wsj.com. Read more Economics coverage.
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