Fed Has Not One Word About Fiscal Deficits

Wednesday, July 19, 2006

Amidst a general advertisement for the strength of the US economy and persistent reminders that inflation is here and will likely not go away that easy, the Federal Reserve's testimony to Congress lacks an important memo to the government. Ben Bernanke, at his first appearance as Fed chairman on Capitol hill, did not once utter a word about fiscal deficits or address the government in any other way. The Fed under Greenspan was a constant reminder that something should be done about unsustainable double deficits.
Not so in Bernanke's initial address that offers too much comfort and too little in critical analysis.
No word on deficits, no word on Fannie Mae and Freddie Mac. OK, not that the White House has in any way heeded Greenspan's advice, but the Fed going completely silent on pressing matters under a Bush regime that strictly bars any dissent I begin to wonder how much value will lie in future information.
I wonder if overstretched real estate users (does one really own a place mortgaged to the bank?) will find comfort in the Fed's take on consumers:
"The slowing of the housing market may restrain other forms of household spending as well. With homeowners no longer experiencing increases in the equity value of their homes at the rapid pace seen in the past few years, and with the recent declines in stock prices, increases in household net worth are likely to provide less of a boost to consumer expenditures than they have in the recent past. That said, favorable fundamentals, including relatively low unemployment and rising disposable incomes, should provide support for consumer spending. Overall, household expenditures appear likely to expand at a moderate pace, providing continued impetus to the overall economic expansion."
From "Core" To PCE
The Fed also signals a more dovish take on inflation. From "core" it shifts its eye further to the Personal Consumer Expenditures (PCE) indicator - to be exact the "core" PCE - which paints an even softer picture and is seen between 2.25% and 3% this year and 2% to 2.25% in 2007. A dove greets.
Real GDP growth is seen at 3% to 3.75% in the running year and the Fed expects growth to slow 2.5% to 3.25% next year.
Rates? Bet For Worse
Reiterating its view that future rate policy will depend on incomaing data I still see no reason why the Fed should step off the accelerator. Take note that "other" commodities next to energy have inched up the watchlist of the Fed.
"Inflation has been higher than we had anticipated in February, partly as a result of further sharp increases in the prices of energy and other commodities,"
said Bernanke, describing what drives prices higher. Looking at oil prices and gold's reaction to Bernanke's testimony I see more trouble ahead than the benign Fed.


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