Economy | timiacono.com - Part 30

From this commentary by Liam Halligan at the U.K. Telegraph comes a good summary of what the Federal Reserve faces in the months ahead as they restart the “taper talk” that ended so badly over the summer while a new round of debate begins in Washington over the nation’s budget woes and elected officials on the Senate Banking Committee prepare their questions for Fed Chair nominee Janet Yellen.

In its September statement, the Fed had said that “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labour market”. In the October minutes, that sentence was gone – causing some to argue that tapering is now more likely, because the economy is improving.

Yet, the only reason “that tightening of financial conditions” has gone is because, since early September, when it lost its nerve, the US central bank has stopped talking about tapering. This illustrates the Fed’s Catch-22. If Bernanke starts preparing the world for tapering again, yields will start to spiral, choking off recovery and robbing the Fed of its resolve to taper. So US policymakers are caught in a trap – a seemingly inescapable dilemma that stems directly from the massive scale of QE.

These issues will come to a head, and in full public gaze, during Congressional hearings into the nomination of Janet Yellen as Bernanke’s replacement.

The title “The Fed is locked in a QE prison of its own making” is pretty good too.

In this item at Advisor Perspectives, Doug Short brings us up to date with the latest on the ECRI (Economic Cycles Research Institute) weekly leading indicators that recently dropped back down to about the long-term average. It looks like we’re at least another few months away from the next ECRI recession call.

I remember vividly how, a year or two ago, ECRI Co-Founder and Chief Operations Officer Lakshman Achuthan asserted that the U.S. economy can not continue for an extended period of time at growth rates between one and two percent – that it has to either speed up or slow down with his firm favoring the latter. Yet, that’s exactly what we’ve seen in the U.S. in what can only be described as a “recession free” extended period of slow growth.

Strong Manufacturing Expansion Continues

The Institute for Supply Management reported that the nation’s manufacturing sector continued to expand last month as the ISM Manufacturing Index rose from 56.2 in September to 56.4 in October, the best reading since early-2011.

Naturally, stocks appear to like this news as should be clear from the graphic below.

New orders, a key leading indicator, remain quite strong, this component rising from 60.5 to 60.6 for the third straight 60+ reading (recall that numbers above and below 50 indicate expansion and contraction, respectively). The production index also stayed above 60, down from 62.6 to 60.8, while employment expanded at a slower pace, down from 55.4 to 53.2.

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Deer Panicked by Hawkish Tone of Fed?

As expected, the gathering of Federal Reserve officials in Washington yesterday resulted in no change to monetary policy, though some analysts think the policy statement was more hawkish. (Before anyone gets carried away in interpreting slight changes to their latest policy statement, it’s worth remembering how badly everyone misread the Fed last month).

But, in Cincinnati, OH, there was excitement at the Fed as the local deer population may have already concluded the central bank will taper their money printing effort sooner, rather than later, one of these animals charging head first into the local Fed branch.

The poor deer had to be euthanized after severely injuring itself (be careful not to watch the video too closely), a fate that the U.S. economy and asset markets will hopefully avoid.

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