Tuesday, September 04, 2007

"Fluid and uncertain" 

The Financial Times suggests this morning that Bernanke needs time to build a consensus for a rate cut, and that's likely to mean no inter-meeting reduction in the Fed funds rate.
Unlike his predecessor Alan Greenspan, Mr Bernanke is likely to go to considerable lengths to achieve consensus among his colleagues as to what should be done.

This will take time, which is one reason why the Fed is unlikely to cut rates between now and September 18, unless there is a sudden downward spiral in the markets.

In a speech on Friday Mr Bernanke provided intellectual leadership to the committee, edging it in the direction of a rate cut by emphasising the uncertainty of the economic outlook, the severity of the market crisis and the possible spillovers, to housing in particular.

Yet at the same time he continued to qualify his statements by noting that the risks depended to a considerable extent on how markets performed in coming days, and promising to use the timely data and information from business contacts to guide policy.

The differences on the committee are not hard divisions: all FOMC members see the situation as fluid and uncertain, and are revising their views in the light of new data and market developments.

These developments may well resolve the differences on the committee by September 18.

Yet there remains a strong chance the Fed could face a tough call against an ambiguous backdrop of limited improvement in markets and little hard evidence on spill-over effects.
The 18th date means they will have August CPI data in hand as a quick peek (formal release is the next day) along with retail sales and industrial production, so they should actually have a pretty good feel for how August went in the broader, real sector. Of course it's only one month. Early signs are that manufacturing has evaded the credit problems, which might favor the 25-bp side of the debate. I cannot imagine a no-change action, but again it's a fluid situation.

Ken Rogoff is of course right that the data the Fed will have at that meeting is 'fuzzy', though he puts more stock in the signal from asset market prices than I might. Asset prices fluctuate due to liquidity changes, and I am not convinced that the Fed should respond with permanent expansions of the money supply to those temporary changes. But I think the FT article will prove accurate -- no change before 9/18.