Friday, November 30, 2007

Bernanke's Speech

From Bernanke's speech:

How has the economic picture changed in the month since that meeting? As is often the case, the incoming economic data have been mixed. In the market for residential real estate, indicators of construction and home sales have continued to be weak. In contrast, the labor market remained solid in October, with some 130,000 new jobs added to private-sector payrolls and the unemployment rate remaining at 4.7 percent. Claims for unemployment insurance have drifted up a bit in recent weeks, although, on average, they have remained at a level consistent with moderate expansion in employment. We will, of course, have the labor market report for November next week, and in the coming days we will continue to draw on anecdotal reports, surveys, and other sources of information about employment and wages. Continued good performance by the labor market is important for maintaining the economic expansion, as growth in earnings helps to underpin household spending.

With respect to household spending, the data received over the past month have been on the soft side. The Committee will have considerable additional information on consumer purchases and sentiment to digest before its next meeting. I expect household income and spending to continue to grow, but the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead.

Core inflation--that is, inflation excluding the relatively more volatile prices of food and energy--has remained moderate. However, the price of crude oil has continued its rise over the past month, a rise that will be reflected in gasoline and heating oil prices and, of course, in the overall inflation rate in the near term. Moreover, increases in food prices and in the prices of some imported goods have the potential to put additional pressures on inflation and inflation expectations. The effectiveness of monetary policy depends critically on maintaining the public’s confidence that inflation will be well controlled. We are accordingly monitoring inflation developments closely.

I've explained my reservations about the current employment numbers in this article.. Short version: the birth/death model is responsible for a large number of recently created jobs. While I can't say for certain these reports are wrong, I personally have some very deep suspicions about their veracity.

Dealing with consumer spending is incredibly complicated. Let's start with a basic premise: Americans love to shop. They will do anything to keep on shopping. Parents will sell their children for medical experiments to keep shopping. Any headwinds have to be seen in this light. However, there are a ton of headwinds out there. The question is what is the exact relationship between fact number one and the current economic environment? Exactly how strong are the headwinds and to what degree are people heeding them? I have no idea, and figuring that one out is a Herculean economic task.

As for his statements on inflation ... Ben can read charts! Ben can read charts! Thank God he finally started to mention food and energy inflation. I was beginning to wonder just how out-of-touch he was. As to what he does about it is anybody's guess. But at least he knows the problem is out there and will probably have a negative impact on prices.

Being the Fed Chairman right now would suck. On one hand you have an economy that is withstanding a financial market catastrophe and slower economic growth. On the other hand, you have inflation.

Personally -- and not like Ben calls me on a regular basis or anything -- I'd err on the side of keeping the inflation genie in the bottle. Once inflation starts to run, getting it back under control is often an extremely painful process (just ask Paul Volcker). And as I've said time and time again, the issue in the credit markets is about counter-party confidence not money. So lowering rates really isn't the solution.