Financial markets are still trying to digest the Fed’s QE3 announcement (and the prospect of intervention by other central banks around the world), as well as newly arriving economic reports.
The big stuff is due next week (ISMs and jobs), but some jigsaw pieces this week were useful. Orders for durable goods crashed hard, down 13.2 percent in August, but only 1.6 percent excluding volatile transportation orders — and the index itself is volatile. Household incomes rose only 0.1 percent in August, consistent with flat wages.
Housing data continue to improve. One of the best indicators has been the Fannie-Freddie combined "serious delinquency" rate, loans 90+ days late or in foreclosure. From a normal level way below 1 percent (of 29,000,000 loans, $5.2 trillion) this category rose to 4.93 percent in Q1 2010. Down to 4.02 percent by Q1 2011, and in the most recent data to 3.50 percent in Q2 2012. Slow, but very good news.
Right-wing propaganda notwithstanding, the serious delinquency problem has been far worse in private-market trash than at Fannie and Freddie. Nevertheless, total-market numbers are making progress, too. In August 2011, we had 3,840,000 homes somewhere between 90+ days late and in foreclosure, plus another 500,000 or so REO post-foreclosure. Today REO is about the same, but the pipeline is down by 300,000. Very slow, slower than Fannie and Freddie, but gradually draining this ocean of pain, and not so fast as to undercut stabilizing markets.
None of this data supports the need for and extent of QE3. Thus I stick to my guns of last week: the Fed acted from deep concern for instabilities in Europe and China.
All of which begs another question, horribly mangled in media and politics. Why the Fed’s sudden focus on reducing unemployment? Paul Volcker, New Age avuncular hero, without hesitation drove unemployment over 11 percent in 1981 to stop an inflation problem. A "hawk" at the Fed is usually regarded as an inflation-fighter; today, the hawks who oppose Perfesser Bernanke’s activism do mutter about inflation, but its total absence as a hazard in the last 20 years means that to be a hawk today is to be a nest-sitter. Hatching nothing, just perched in perpetuity, and grumpy about anything moving at all.
The Perfesser has many other opponents. Father and son Paul, without a brain between them. Nest-sitters throughout the Right. Really nasty SOBs in markets, Rick Santelli leading, who object to the Fed because it interferes with their trading. If I’ve set a perfect bet on economic disaster, and the Fed jumps in to save the place… well, how dare they? Unfettered private markets! Then I get to cash in. If there is any.
I am not a fan of conspiracy theories. The following is too simple to be much of one, anyway. Perfesser Bernanke makes constant reference to unemployment now because he has to have protection from Fed-enemies, and does not have recession-quality data to support pre-emptive QE3 to protect the U.S. from deepening external chaos.
The following is the "dual mandate" language from the 1977 amendment to the Federal Reserve Act:
"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."
At the time, everyone in the markets hooted at the revision. Which is it? Maximum employment OR stable prices? Can’t have both for any length of time. The amendment was actually designed to prevent the Fed from doing anything bad to stop the inflation then plaguing the economy. Didn’t stop Volcker — he found his own fig leaf in phony "monetarism," selling the nation on the need to control the money supply to stop inflation. He knew perfectly well that high rates and unemployment were necessary.
Perfesser Bernanke knows, too. He’ll abort QE3 in an instant if it turns out to be inflationary. But at the moment, the dual mandate is his fig leaf. Wish him well.
The Chicago Fed’s month National Activity Index (and "MA3," three-month moving average) is as good an overall indicator as any. It is weak, maybe weakening, but still not showing recession.
