Asha G. Bangalore agb3@ntrs.com Minutes of August 9 FOMC Meeting Debate Indicates Fed is Inclined to Ease, if Necessary August 3, 211 The minutes of the August 9 FOMC meeting reveal a range of opinions about monetary policy easing options the Fed has to fulfill its dual mandate of full employment and price stability. The minutes leave the reader with the impression that Chairman Bernanke has votes for further monetary policy easing but there were members who were convinced that additional easing is not called for at the present time. The August ISM manufacturing survey results, auto sales, non-auto retail sales, and employment numbers hold the key to whether Bernanke can persuade all or some of the three dissenters change their opinion about the status of the economy. A few members of the FOMC members indicated that they would have preferred forward guidance in terms of the status of the economy such as a specific unemployment rate and/or the preferred inflation rate as opposed to a timeframe that is currently in place. QE3 featured as a possible option to ease monetary policy in the discussion, as did the option of increasing the maturity of their holdings of Fed. Some members indicated that additional easing of monetary policy should have been put in place at the September meeting. There was very scant support for lowering interest rates on excess reserves. On the other side of the aisle, few members of the FOMC argued for no action as they held the opinion that policy actions were ineffective because the potential capacity of the economy had been lowered as a result of the crisis and additional stimulus would be ineffective. This group also reinforced the notion that if the potential GDP had been reduced, then monetary policy easing would be inflationary. The FOMC will meet for a two-day period instead of a single day to enable a fuller discussion of the options available. Consumer Confidence Index Plunged in August The Conference Board s Consumer Confidence fell to 44.5 in August from 59.2 in July. The Present Situation Index declined to 33.3 from 35.7 in July, while the Expectations Index dropped to 51.9 from 74.9 in July. The level of the Consumer Confidence Index is the lowest since April 29; excluding the recent recession, this index breached a similar reading in December 1974. In other words, there are very instances since 1967 when the Consumer Confidence has recorded low readings of this magnitude.
Chart 1 15 Consumer Confidence SA, 1985= 15 1 1 75 75 5 5 7 75 8 85 9 Source: The Conference Board /Haver Analytics A larger number of respondents noted that jobs have been hard to get in August (49.1%) compared with July (44.8%). At the same time, fewer respondents noted that jobs were plentiful (4.7%) in August vs. July (5.1%). The net of these two indexes has a significant positive correlation with the unemployment rate. The net measure widened in August to 44.4 from 39.7 in July, implying that a higher unemployment rate is possible during July. 95 5 2
Chart 2 Job-Hard-to-Get Index Minus Jobs-Plentiful Index 5 r =.89 Civilian Unemployment Rate: 16 yr + SA, % 12 8 6-4 -5 9 Source: Haver Analytics 95 5 2 Case-Shiller Home Price Index: Interpret With Care The Case-Shiller Home Price Index slipped.1% in June vs. the May reading. On a year-to-year basis, the index declined 4.5% in June, nearly matching the 4.6% drop in May. The important message is that the downward trend has not been reversed since October 2, after showing a decelerating trend since June 2 (see Chart 1). Each of the 2 metro areas posted year-to-year declines in June. However, on a monthly basis, nine out of twenty metro areas posted gains during June. With the exception of a brief period (February 2-September 2), the Case- Shiller Home Price Index has posted declines since January 27. 3
Chart 3 2 S&P/Case-Shiller Home Price Index: Composite 2 % Change - Year to Year NSA, Jan-= 2 - - -2 1 2 3 4 5 6 7 8 Source: S&P, Fiserv, and MacroMarkets LLC /Haver Analytics 9 11-2 It is important to note that the first-time home buyer artificially raised home prices and has distorted readings. An alternative way of looking at home prices is by comparing the level of the price index. Chart 4 shows that the current level of the home price index almost matches the reading that prevailed prior to the implementation of the first time home buyer program. Based on this information, the trend of home prices in the months ahead will indicate if home prices are stabilizing or if they are continuing present a challenge. 4
Chart 4 22 S&P/Case-Shiller Home Price Index: Composite 2 SA, Jan-= 22 2 2 18 18 16 16 14 14 12 12 1 2 3 4 5 6 7 8 9 Source: S&P, Fiserv, and MacroMarkets LLC /Haver Analytics 11 12 5