August 26, 2011
Economics Group
John Silvia, Chief Economist john.silvia@wellsfargo.com ● (704) 374-7034
Tacking in Treacherous Water: No Full Sail QE3 Chairman Bernanke today played the role of senior statesman, not flame thrower. There was no hint of QE3— only the assurance that the Fed is monitoring the economy and inflation and is ready to help—as expected. Growth Disappoints, but Remains Positive From the picturesque backdrop of the Teton mountain range, Fed Chairman Ben Bernanke delivered his highly anticipated economic address. While still of the opinion that growth should improve as the influences of the temporary factors of the first half of the year fade, Bernanke used a large part of the speech to urge Washington to put the U.S. fiscal position on a “sustainable path” without disregarding the “fragility of the current recovery.” Little guidance was given to the near-term policy outlook. Growth expectations for the year ahead had already been downgraded by the Federal Open Market Committee (FOMC) at the August 6 meeting, and Chairman Bernanke reiterated his concerns—including an acknowledgment of the recent financial market volatility that has weighed on business and consumer confidence. While the top chart does not reflect the Fed’s updated forecast (details may be released at the now two-day Sept. 20-21 FOMC meeting), clearly near-term growth expectations will be lowered. After the latest GDP revisions, there is the possibility that long-run growth expectations have been lowered, which raises the probability that the full employment level of unemployment may be higher than many expected. Moreover, the potential for higher inflation than otherwise expected would also be higher. These are not comfortable outcomes and they narrow the channel for sailing for Fed policy. Creeping Inflation: Not So Transitory, but What Fed Wanted For some time, the markets perceived that the goal of the Fed was to avoid deflation and thereby generate moderate inflation. At this point the Fed appears to have succeeded. As evidenced in the middle chart, the core Personal Consumption Deflator, the benchmark for measuring inflation pressures from the Fed’s point of view, has been rising as would be consistent with its intentions. However, the annualized pace of 2.1 percent over the past three months has picked up substantially over the 0.9 percent pace recorded last August and should give the Fed pause on the thought of further easing. Moreover, the three dissents by Federal Reserve bank presidents at the last FOMC meeting and more recent statements by Kansas City Fed President Hoenig and the other presidents that downplay the risks of recession can clearly be taken by investors that the Fed will move cautiously without any additional policy moves. In Treacherous Waters: You Don’t Put Up Full Sail When sailing treacherous economic waters, hauling up the full sail of QE3 would be a high risk move and a cautious central bank such as the Fed is not likely to follow such a strategy. Instead, as outlined by several Fed speakers before him, Bernanke acknowledged the range of tools the Fed still has at its disposal to provide additional monetary stimulus.
Real GDP Growth Forecast Fed Central Tendency Forecast vs. Wells Fargo Forecast
6.0%
6.0%
4.0%
4.0%
2.0%
2.0% 1.1%
1.3%
0.0%
0.0%
-2.0%
-2.0% Central Tendency Forecast Range Historical GDP Growth Wells Fargo Economics Forecast
-4.0%
-4.0% 2000
2002
2004
2006
2008
2010
2012
"Core" PCE Deflator Both Series are 3-Month Moving Averages
5%
5%
3-Month Annual Rate: Jun @ 2.1% Year-over-Year Percent Change: Jun @ 1.3% 4%
4%
3%
3%
2%
2%
1%
1%
0%
0% 92
94
96
98
00
02
04
06
08
10
Steepness of Treasury Curve Between 10-Yr and 2-Yr, Basis Points
300
300
10Y-2Y Treasury: Aug @ 209 Bps 250
250
200
200
150
150
100
100
50
50
0
0
-50 2005
-50 2006
2007
Source: Federal Reserve Board, U.S. Department of Labor and Wells Fargo Securities, LLC
2008
2009
2010
2011
Wells Fargo Securities, LLC Economics Group Diane Schumaker-Krieg
Global Head of Research (704) 715-8437 & Economics (212) 214-5070
diane.schumaker@wellsfargo.com
Paul Jeanne
Associate Director of Research & Economics
(443) 263-6534
paul.jeanne@wellsfargo.com
John E. Silvia, Ph.D.
Chief Economist
(704) 374-7034
john.silvia@wellsfargo.com
Mark Vitner
Senior Economist
(704) 383-5635
mark.vitner@wellsfargo.com
Jay Bryson, Ph.D.
Global Economist
(704) 383-3518
jay.bryson@wellsfargo.com
Scott Anderson, Ph.D.
Senior Economist
(612) 667-9281
scott.a.anderson@wellsfargo.com
Eugenio Aleman, Ph.D.
Senior Economist
(704) 715-0314
eugenio.j.aleman@wellsfargo.com
Sam Bullard
Senior Economist
(704) 383-7372
sam.bullard@wellsfargo.com
Anika Khan
Economist
(704) 715-0575
anika.khan@wellsfargo.com
Azhar Iqbal
Econometrician
(704) 383-6805
azhar.iqbal@wellsfargo.com
Ed Kashmarek
Economist
(612) 667-0479
ed.kashmarek@wellsfargo.com
Tim Quinlan
Economist
(704) 374-4407
tim.quinlan@wellsfargo.com
Michael A. Brown
Economist
(704) 715-0569
michael.a.brown@wellsfargo.com
Tyler B. Kruse
Economic Analyst
(704) 715-1030
tyler.kruse@wellsfargo.com
Joe Seydl
Economic Analyst
(704) 715-1488
joseph.seydl@wellsfargo.com
Sarah Watt
Economic Analyst
(704) 374-7142
sarah.watt@wellsfargo.com
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