Bernanke Hints at Near-Term FOMC Pause

By: Paul Kasriel | Fri, Apr 28, 2006
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In his testimony to the Joint Economic Committee today, Fed Chairman Bernanke sent a strong hint of an imminent FOMC pause in its funds rate increases. Mind you, a May 10 rate hike of 25 basis points is almost a done deal as implied by the following excerpt from Bernanke's prepared comments of today:

"In the statement issued after its March meeting, the FOMC noted that economic growth had rebounded strongly in the first quarter but appeared likely to moderate to a more sustainable pace. It further noted that a number of factors have contributed to the stability in core inflation. However, the Committee also viewed the possibility that core inflation might rise as a risk to the achievement of its mandated objectives, and it judged that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In my view, data arriving since the meeting have not materially changed that assessment of the risks." [emphasis added]

The "pause" hint comes from the following excerpts:

"Focusing on the medium-term forecast horizon is necessary because of the lags with which monetary policy affects the economy." [emphasis added]

"In particular, even if in the Committee's judgment the risks to its objectives are not entirely balanced, at some point in the future the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook. Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings, and the Committee will not hesitate to act when it determines that doing so is needed to foster the achievement of the Federal Reserve's mandated objectives." [emphasis added]

Firstly, from these excerpts we learn that the FOMC is trying to look ahead at likely economic performance rather than just behind at past performance, hence the reference to "the medium-term forecast horizon." Secondly, we learn that the FOMC implicitly appreciates the lagged effects of past interest rate increases when Bernanke states that the FOMC might decide to "take no action" in order to "receive information relevant to the outlook" even if the perceived "risks to its objectives are not entirely balanced." If the FOMC does pause, it does not want the financial markets to prejudge its next policy moves. In order to control these expectations, Bernanke threw in that "a decision to take no action at a particular meeting does not preclude actions at subsequent meetings.

Putting all of this together, along with the FOMC's heightened concern about the housing market, I think there is a better than 50% probability that the FOMC will signal a pause after increasing the funds rate by 25 basis points to 5% at its May 10 meeting.

The Housing Market Environment - Government Stats vs. Company Stats

It was reported yesterday by the Census Bureau that new single-family-home sales rose 13.8% in March. Hmm. All this talk about the housing sector weakening must be just that - talk. But wait a minute. Yesterday afternoon and this morning some large national homebuilding corporations announced their first quarter results. Both Centex and Pulte said their year-overyear new order fell 11%. Centex cut its forecast and Pulte's forecast is below that of the consensus. Beazer reported orders down 19% overall, with a decline of 46% in the West. Government statistics are more likely to be revised than are these results from homebuilders. Believe what you want, folks, but the shaky foundation of the housing industry is showing severe cracks. And, as goes housing, so goes the U.S. economy.



Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

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