Markets & Finance

Vital Signs: Balancing Act for the Fed


On deck: the Fed meets, plus updates on productivity, foreign trade, federal budget, retail sales, business inventories, consumer prices and industrial production

It’s a busy week for economic reports, and the markets will have a lot to digest, including the Federal Reserve’s policy meeting. The two-day confab will conclude on Wednesday with the Fed’s policy statement due to hit the newswires at 2:15 p.m. Wall Street is looking for a relatively status quo communiqué.

In his recent Congressional testimony, Fed Chairman Ben Bernanke already offered much information on how the Fed plans to reverse its unconventional efforts to restore balance to the financial markets and the economy. And in the central bank’s June policy statement, it strongly suggested it has no plans to expand its current asset purchase programs.

That doesn’t mean the markets have lost interest. On the contrary, they still have great concern over the Fed’s plans to withdraw the massive monetary fuel it has pumped into the system since last September. There has never been any doubt among market professionals about the central bank’s ability sop up the excess funds. The question has always been about the timing: Will the Fed get it right? Too much tightening, too early, and the economy could slip back into recession. Too little, too late could allow a resurgence in inflation.

Bernanke offered a broad outline of the Fed’s strategy in his July 21-22 testimony. It was clear that central bank’s primary tool will be its new authority to pay interest on the funds that banks hold on deposit at the Fed. That rate effectively puts a floor under the Fed’s target interest rate. By increasing both, the central bank can drain the excess funds. Since banks would rather earn the risk-free rate the Fed pays than a lower or riskier rate it could earn by lending the funds, the Fed can offer banks a powerful incentive that will pull funds out of the system and prevent them from generating an excessive amount of new credit that could fuel inflation.

All this means the Fed does not have to immediately sell off its new and very large holdings of long-term mortgage and Treasury securities, an action that could disrupt those markets and push up long-term rates. Indeed, the Fed seems intent on holding those securities to maturity—and in the process making a tidy profit for the Treasury.

Fed officials have made it clear, however, that any efforts to begin draining excess funds and tightening policy are still a long way off. The Fed will almost certainly reiterate that message in its Aug... 12 statement. Policymakers are still concerned about the fragility of any recovery that may now be developing. Fed members are most concerned about the weakness in the labor markets and the impact that will have on consumer spending, especially on top of weak household balance sheets and tight credit. In a pointed remark, New York Fed President Bill Dudley, who sits on the Fed’s policy committee, said it was “premature” to even begin discussing when the Fed will start to tighten policy.

The Fed’s main challenge now and over the next few quarters will be to balance its concerns about the sustainability of the recovery against the worries in the markets that trying to assure a lasting recovery might rekindle inflation. It will most likely be a lot more difficult than the Fed’s recent confident-sounding rhetoric.

Here’s the weekly calendar, from Action Economic.

Top Economic Reports

Report

Date

Time

For

Median Estimate

Last Period

Nonfarm Productivity (Preliminary)

Tuesday, Aug.. 11

8:30 a.m.

Q2

3.7%

1.6%

Unit Labor Costs (Preliminary)

Tuesday, Aug.. 11

8:30 a.m.

Q2

-2.4%

3.0%

Wholesale Trade Sales

Tuesday, Aug.. 11

10:00 a.m.

June

0.1%

0.2%

Trade Balance ($Billions)

Wednesday, Aug.. 12

8:30 a.m.

June

-$28.4

-$26.0

Goods & Services Exports ($Billions)

Wednesday, Aug.. 12

8:30 a.m.

June

$123.0

$123.3

Goods & Services Imports ($Billions)

Wednesday, Aug.. 12

8:30 a.m.

June

$151.0

$149.3

Treasury Budget ($Billions)

Wednesday, Aug.. 12

2:00 p.m.

July

-$167.5

-$94.3

Retail Sales

Thursday, Aug.. 13

8:30 a.m.

June

0.2%

0.6%

Retail Sales (excluding autos)

Thursday, Aug.. 13

8:30 a.m.

June

0.3%

0.3%

Export Prices

Thursday, Aug.. 13

8:30 a.m.

July

0.5%

1.1%

Import Prices

Thursday, Aug.. 13

8:30 a.m.

July

0.1%

3.2%

Business Inventories

Thursday, Aug.. 13

10:00 a.m.

June

-0.7%

-1.0%

Consumer Price Index

Friday, Aug.. 14

8:30 a.m.

July

0.1%

0.7%

Consumer Price Index (excluding food & energy)

Friday, Aug.. 14

8:30 a.m.

July

0.2%

0.2%

Industrial Production

Friday, Aug.. 14

9:15 a.m.

July

-0.2%

-0.4%

Capacity Utilization

Friday, Aug.. 14

9:15 a.m.

July

67.9%

68.0%

Consumer Sentiment Index (preliminary)

Friday, Aug.. 14

9:55 a.m.

Aug..ust

66.7

66.0

Other Reports and Events

Reports/ Events

Date

Time

For

NFIB (Small Business) Survey

Tuesday, Aug. 11

7:30 a.m.

June

ICSC-UBS Store Sales

Tuesday, Aug. 11

7:45 a.m.

Aug. 9-15

Johnson Redbook Weekly Store Sales

Tuesday, Aug. 11

8:55 a.m.

Aug. 9-15

Federal Reserve FOMC Meeting (First Day)

Tuesday, Aug. 11

9:00 a.m.

Mortgage Applications

Wednesday, Aug. 12

7:00 a.m.

Aug. 9-15

Federal Reserve FOMC Meeting (Second Day)

Wednesday, Aug. 12

2:15 p.m.

Statement

Initial Unemployment Claims

Thursday, Aug. 13

8:30 a.m.

Aug. 9-15


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