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After a week which has been replete with important economic and political news from the US, the bulk of the incoming information has confirmed what we knew already. The Fed has embarked on QE2, more or less exactly as expected. The Republicans took the House but not the Senate, and the President’s initial reaction suggests that the Bush tax cuts will probably be extended, which was the central case before the election. And the economy continues to grow at a pace which is neither fast enough to bring unemployment down, nor slow enough to threaten a double dip. While all of this was broadly as expected, there have been some interesting (and mostly encouraging) developments which are worth noting.
So what do we know today that we did not know a week ago? Three things:
1. Private employment is growing steadily. President Obama emphasised this in his news conference on Friday, and he was justified in doing so. The labor market data for October showed a gain of 159,000 private sector jobs and, equally importantly, the data for prior months was revised upwards, so we can now see that private job creation has been continuously positive since the recovery in the labor market started last December. While the job gains have not been at a spectacular rate, and have not been enough to bring unemployment down in recent months, the steadiness of the improvement looks better than it did before. At least the labor market is not showing any signs of getting worse. (Incidentally, I discount today’s drop of 330,000 jobs shown in the household survey, since this series is extremely volatile on a monthly basis, and is often very misleading.)
2. Leading indicators in business surveys have improved markedly. The ISM surveys for October have been published this week. In both manufacturing and non manufacturing, the rise in the headline figures this month have been significantly better than economists expected (and this has also been true in most other countries). Furthermore, as the graph shows, new orders have picked up markedly, relative to the level of inventories, throughout the economy. During the summer months, this relationship had dipped in a rather ominous manner, threatening much lower economic growth in Q4 as firms cut production to reduce undesired levels of stocks. For reasons I am not confident that I fully understand, this does not seem to have happened, and the prospects for growth in Q4 now seem a lot better.
3. The Fed has delivered QE2, and there are now two-way risks on Fed policy. In the past few weeks, the market has been gradually adjusting to the likely arrival of QE2. In retrospect, this has been a one way bet ever since Mr Bernanke’s speech at Jackson Hole, and especially since the Fed Chairman started to tell us that US core inflation is “too low”, in italics of his choosing. The direction of Fed policy is no longer a one way bet.
On Wednesday, the FOMC said that it would “regularly review the pace . . . and overall size of the asset purchase program in light of incoming information”. The market has not wanted to pay attention to this, but it could mean that the size and speed of QE2 could be reduced if the economy expands more rapidly than expected.
And the tone of Mr Bernanke’s language on inflation seemed much less dovish in his article in the Washington Post on Thursday. In contrast to some of his recent remarks, he said that inflation is “very low”, not “too low”. He also said that low inflation is “generally good”, and promised that “the Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable.” This is much more orthodox central bank language than he has been using recently. Either the chairman has been reined back by his colleagues, or he has become worried by the rise in inflation expectations in the TIPs market.
Either way, it cannot be safely assumed that he will in future remain as dovish as he has been recently.
Tags: Ben Bernanke, QE2, The Fed
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