Economic First Look: Focus on the Fed

 | Jan 21, 2012 | 8:30 AM EST
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  • No major economic indicators.


  • FOMC meeting begins.
  • Barack Obama speaks, 9 p.m. (all times EST).


  • FHFA House Price Index, 10 a.m.
  • Pending Home Sales Index, 10 a.m.
  • EIA Petroleum Status Report, 10:30 a.m.
  • FOMC Meeting Announcement, 12:30 p.m.
  • Fed Chairman Press Conference, 2:15 p.m.


  • Durable Goods Orders, 8:30 a.m.
  • Jobless Claims, 8:30 a.m.
  • New Home Sales, 10 a.m.
  • Leading Indicators, 10 a.m.


  • GDP, 8:30 a.m.
  • Consumer Sentiment (University of Michigan measure), 9:55 a.m.



There is a lot of important economic news on the calendar this week. GDP will probably be the focus of many investors on Friday, as it will be the first comprehensive read of economic activity in the fourth quarter. But I caution that GDP undergoes three estimates before the final number for the quarter is calculated. (Even then, GDP is often revised, sometimes well after the fact.) The report on Friday is the first of those three estimates. It is based on incomplete information, with the Bureau of Economic Analysis at the Department of Commerce providing estimates for some of those figures. International trade data, for example, are not available yet, so we'll have to wait until the second estimate for GDP is produced to get a report that includes that data.

Some analysts are forecasting GDP growth in the neighborhood of roughly 3% or so, which is well above what we've seen in the past year. But these same analysts caution that some of this growth merely represents a bounce back from the blows the economy faced earlier from events such as the Japan earthquake and tsunami and the confidence implosion following the debt ceiling debate fiasco in the summer. So, assuming GDP does come in better than data we have seen in the past year, take it with a grain of salt and don't project that trend to continue in the future. It may continue at a higher rate, of course, but there are plenty of reasons why the fourth quarter data might be a bit higher, but representing transitory, not persistent, conditions.

What many investors are more interested in, though, is in the Federal Open Market Committee (FOMC) meeting this week. Some think the Federal Reserve may actually take more action to spur the economy. It may use words instead of dollars to do this -- providing greater transparency and, thus, removing uncertainty and increasing confidence – which could stimulate economic activity by allowing businesses and consumers to plan better. Communication from the Fed can sometimes provide a more explicit inflation target or an unemployment rate that would cause it to shift its stance, or offer more guidance (or even caveats) on the calendar date through which low rates might continue. They are now projected to last at least through mid-2013.

Of course, if the Fed does continue to provide a commitment to keep rates low through a specified period, whether that is 2013 or 2014 or whenever, it will take away some incentive for a business or consumer to borrow now instead of later. If I expected rates to go higher soon, I would take out my mortgage or business loan now, rather than wait, and that could spur home sales or business expansion sooner rather than later. But if I know that rates will still be low next year, why not put off those larger expenditures until I see how the rest of the economy is doing? Uncertainty runs both ways. Sometimes a little uncertainty can be good, as it can spur more immediate action.

As to actual cash injections into the system? Not so fast. The Fed is quite divided on further action. In a previous column, A Fed Rotation Cheat Sheet, I discussed the views of a number of FOMC members, which were especially important since 2012 brings a new roster of Fed voters. A consensus among new voting members for further action in the form of stimulus is unlikely. I'm not saying it absolutely won't happen, but I certainly am not going to bank on it.

Still, some arguments can be made that bringing down mortgage rates, such as by reducing longer- term Treasury yields, has helped a bit in the housing market. I recently discussed this in a Columnist Conversation post. It does appear that consumers are more willing to apply for mortgages now, even if most of the mortgage application growth recently is for refinancings. And the Fed might have scope to do more without its actions becoming inflationary, as I discussed in Friday's column, The Latest Outlook for Inflation. So, you could make the argument that further Fed action might help, particularly in the housing market, and the Fed might act without perhaps becoming overly concerned about inflation.

But, with the emphasis on this week's meeting, here's the question: Is the Fed likely to do so? My view is no. I don't expect any action this week that involves actual dollars and not just words. Operation Twist was the Fed's latest tool, and its effects still are being evaluated. It is far too soon to see how -- and importantly, if -- that program is providing any meaningful results in the economy that can pacify some of the more hawkish, or at least cautious, members of the Fed. I think it will be "wait and see" for this meeting, though the Fed may announce measures to boost transparency and communication.

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