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Fed members' speeches

Beige Book: Little Changed From Last Report

Yesterday, FOMC published Beige Book which shows that activity continued to expand at a modest to moderate pace during the reporting period of early July through late August.


A few excerpts from the Fed classified by theme:


1/ Sum up
- Activity continued to expand at a modest to moderate pace during the reporting period of early July through late August. Eight Districts characterized growth as moderate; of the remaining four, Boston, Atlanta, and San Francisco reported modest growth, and Chicago indicated activity had improved.
2/ Consumption
- Reports indicated that consumer spending rose in most Districts. A few Districts mentioned that back-to-school sales contributed to overall consumer spending growth.
3/ Manufacturing
- Manufacturing activity expanded modestly during the reporting period.
4/ Nonfinancial Services
- Demand for nonfinancial services improved modestly overall since the previous Beige Book. Adjusting for seasonal fluctuations, providers of various professional and business services such as accounting, consulting, information, transportation, and legal services generally expanded their activities.
5/ Real Estate and Construction
- Activity in residential real estate markets increased moderately. The pace of sales of existing single-family homes continued to increase moderately in most Districts.
- Reports from several Districts suggested that rising home prices and mortgage interest rates may have spurred a pickup in recent market activity, as many “fence sitters” were prompted to commit to purchases.
- Many Districts reported that limited inventories of desirable properties contributed to upward price pressures.
- Demand for nonresidential real estate increased. Office vacancy rates and other indicators in markets for office space improved modestly in the major metropolitan markets.
6/ Banking and Finance
- Lending activity weakened a bit, and several Districts reported less-favorable conditions than in the preceding reporting period.
- Lending standards were largely unchanged, while credit quality improved.
7/ Employment and wages
- For most industries and occupations, hiring held steady or increased somewhat in most Districts.
- Wage pressures remained modest overall.
8/ Inflation
- Upward price pressures were subdued, and price increases were limited during the reporting period.


My view
No surprise, the pace of growth remains historically weak as it keeps on expanding at a modest to moderate rate. Employment situation is slightly improving while inflation stays subdued. On the positive side, we can note that residential real estate market shows positive signs despite rising mortgage rates, however, on the negative side, financial conditions are weakening a bit with lower lending activity.


This analysis is broadly in line with Fed’s Williams comments yesterday which suggests that tapering should start later this year.  At the opposite, this morning, Fed’s Kocherlakota said the central bank’s outlook for inflation and unemployment calls for more accommodation.
***Remind that all Fed members’ speeches concerning QE and economic activity since the last FOMC meeting (July 30-31) are available here.

Fed Members Clarified Bernanke Statement

This week, eight top Fed officials spoke in an effort to clarify the statement of Fed Chairman Bernanke at the post-FOMC decision press conference on June 19th and to reassure panicky investors after the sell off on both equities and bonds’ markets.


The overall tone was to warn markets for misunderstanding the chairman’s message and to emphasize that while tapering of asset purchases will likely begin soon and will only reduces the rate of stimulus addition, interest rates were a separate issue and would remain low for a very long period.


More from Fed members’ speeches:


Fed’s Kocherlakota (dove, FOMC alternate) / Believe it will take another 2 years for US unemployment to drop to 5.5% once it has reached 6.5%. May be appropriate to keep rates near zero even after unemployment falls to 5.5%.


Fed’s Fisher (hawk, FOMC alternate) / Not in favor of ending stimulus immediately; “can’t go from wild turkey to cold turkey.” Exit strategy is still way out in the future. The word ‘exit’ does not work for the Fed now, the exit will be way out in the future.


Fed’s Lacker (hawk, FOMC non-voter) / Low inflation expected to be transitory, markets may have gotten a bit ahead of themselves with respect to tapering response; Not “anywhere near” reducing balance sheet size.


Fed’s Dudley (dove, FOMC voter) / Initial rate hikes are a long way off, could arrive well after 6.5% unemployment level is crossed; economy may diverge significantly from FOMC forecast.


Fed’s Powell (moderate, FOMC voter) / Market expectations for a 2014 rate increase are out of line with the Fed’s view, it is most likely that asset purchases will continue for some time.


Fed’s Lockhart (moderate, FOMC non-voter) / Interest rate increases are likely to come sometime in 2015.


Fed’s Stein (dove, FOMC voter) / The Fed has said nothing that suggests it has plans to change interest rates.


Fed’s Williams (dove, FOMC non-voter) / Cutting bond purchases does not change promise to keep rates low until unemployment falls to 6.5%.


The surge in bond yields that began in early May and accelerated after Bernanke’s June 19th press conference appears to have topped out for the moment after Fed members’ speeches. The yield on the US 10-year hit a nearly two-year high of 2.66% on Monday, but has backed off this level to trade as low as 2.48%.

Analysts note that other bond markets have been even more volatile. For instance the Barclays US Corporate High Yield Index briefly topped 7% early in the week – up from 5% on May 8th.

In the week ended June 26, according to FT, bruised by the first widespread losses for bondholders, investors pulled $8.6bn from US bond funds, contributing to the worst four-week streak since the depths of the financial crisis.