Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
The famous Mr. Dooley once suggested that, despite its independence and insulation, the Supreme Court nonetheless “watched the election returns” (more recently it even got involved in determining the election returns). The Federal Reserve enjoys a certain degree of independence from its political and commercial constituencies as well, and is not supposed to “watch the share markets” in setting monetary policy.
Nevertheless, the equity market has been trying to get the Fed’s attention for some time this summer to convey the sentiment that the problems in the mortgage and broader credit markets portend a greater risk to the economy going forward than inflation. On Tuesday next, we will see if the Fed has taken that message into account both in setting the Federal funds rate and in its accompanying explanatory statement.
Some inkling of a slowdown in consumer spending was evident in today’s retail sales figures for August, but there was enough curiosity about the data to suggest that it may be unreliable as an indicator of sentiment going forward. But consumer confidence also remains soft. What may be at work here is a secondary effect of the recent share market “messaging” to the Fed in terms of the 10% correction against the all-time-high on the Dow and the subsequent daily volatility ever since.
If consumers generally are getting the sense that they may be losing not only their home equity ATM machines of the past few years but also their 401(K) and IRA safety nets (folks just don’t trust in Social Security any more), then the August retail trends could turn even worse in the near term rather than reverting to norm after one aberrant month. So while the Fed should not be bailing out investors in any market, one suspects they may take a peek at the share markets enough to consider the likely market ramifications of any failure to cut the funds rate at least by 25 basis points next week while continuing to signal they stand ready to act to prevent a serious risk of economic downturn. The economy does not need a 1987-style stock market crash to go along with the credit crunch.
And while we’re busy watching the Fed and brokerage firm earnings next week, let’s also watch what happens in Japan with the selection of a new Prime Minister, and his likely policy proclivities toward that country’s central bank “independence”. At least one of the leading candidates favors more autonomy for Japan’s monetary authorities, some of whom have been suggesting the possibility of a rate increase that could spark further runs on the so-called “carry-trade” (another aspect of the “credit Olympics” of the past four years or so), with significant implications for the US dollar and all that implies for good or ill in our economy. Globalization cuts a lot of ways.
Filed under: Uncategorized
Recent Comments