Tuesday, September 05, 2006

Poole On Bloomberg Tells Us All We Need To Know

Poole had a q & a on Bloomberg this morning, and if anyone was uncertain as to where the Fed is and, more important, where it is going to be, he ended all speculation.

Here are some of my highlights from his comments --

On housing and its impact on growth: There are always worry warts, on both sides. Housing is slowing. Fed expected it to slow. Fed wanted it to slow. Slowdown may be a bit more than expected but commercial construction is up and hires the same resources (labor and material) residential construction uses. Further, the employment data indicate an economy growing at potential. No reason to expect cascading weakness from housing to create a much slower economy.

Yield curve and market's forecast of Fed action: Negative curve can be viewed as anticipation of a Fed ease but lower bond yields are also a built-in stabilizer to the economy that helps housing and keeps the economy from getting weaker. As a predictor, curve has given false signals and the bond market is trying to predict policy action that will be driven by new information that, by definition, is random and unpredictable.

A key comment: Looking at a 6 month horizon, 70% of the fluctuation in the bond market comes from new, unanticipated information. New information is random, unpredictable, and policy is driven by new information.......

Summing up: Policy is as tight as it has to be and the economy is growing at potential. As such, inflation should moderate over time and the Fed can be patient and wait months even quarters, no reason to create a disturbance in the economy by changing the funds rate. Fed policy will be driven by new information that is viewed in context with all other information. New information is random and unpredictable. By extension, what the Fed will do in the future is unpredictable.

Meaning: Fed is done. Next policy move can be either way, although there is bias in the logic to presume that the suprise to cause the Fed to act will be indications of a weak economy. As for the timing of the next move --it might be a while, there is no hurry to do anything.

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