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Fed Faces Risk of Fourth Summer Slump While Pushing QE

*from www.bloomberg.com, April 8, 2013 (To view original article click here.)

Take Away #1: This time, Federal Reserve policy makers are prepared for the summertime slump.

Key Facts and Figures:

  • During the past three years, the Fed planned to cut accommodation early in the year only to boost it after economic growth lagged behind its forecasts.
  • Determined not to repeat the error, the Fed will likely push on with $85 billion in monthly bond purchases through the summer, said Drew Matus, a former Federal Reserve Bank of New York economist.
  • “The fact that they’ve been fooled multiple times by slumps in the U.S. economy means they’re going to be a little gun-shy on the exit strategy,” said Matus.

Take Away #2: Last week’s Labor Department report confirmed concerns of William C. Dudley, president of the New York Fed.

Key Facts and Figures:

  • The report showed the economy generated just 88,000 jobs in March, the fewest in nine months, confirming Dudley’s concern that the job market was weaker than it appeared.
  • The April 5 report followed six months of payroll growth averaging 197,000.
  • The March jobs report will probably bolster the argument of FOMC voting members Dudley, Chicago Fed President Charles Evans and Boston’s Eric Rosengren.
  • All three have argued that the central bank should keep adding to record stimulus through the end of the year.

Take Away #3: Treasuries last week soared the most since August on bets a slowing economy will prompt the Fed to maintain bond purchases.

Key Facts and Figures:

  • Ten-year note yields fell 14 basis points, or 0.14 percentage points, to 1.71%.
  • The S&P 500 Index fell less than 0.1% to !,552.30 at 10:51 a.m. in New York.
  • The S&P 500 fell 1% last week, for the biggest decline so far this year, as payrolls missed economists’ estimates.

Take Away #4: “There’s a very strong message to the Fed here, which is that it’s too early to even thin about exiting from easy policy,” said Ethan Harris of Bank of America Corp.

Key Facts and Figures:

  • “This report suggests that they’re missing on both their mandates: Inflation is too low and the labor market is too weak,” said Harris.
  • The concern this year is that a promising start will be derailed by across-the-board federal budget cuts.

Take Away #5: In past years, shocks from Europe, Japan and the Middle East roiled U.S. financial markets and the economy.

Key Facts and Figures:

  • In January 2010, policy makers forecast economic growth of 2.8% to 3.5% for the year and March they allowed the Fed’s $1.7 trillion first round of large scale asset purchases to end.
  • Then the debt crisis in Greece hammered U.S. stocks, with the S&P 500 sliding 16% form late April through the beginning of July.
  • Concerned about the risk of Japanese-style deflation, the Fed started a second, $600 billion round of quantitative easing.
  • The economy ended up growing 2.4% in the fourth-quarter of 2010 over the same period the previous year.
  • By the start of 2011, optimism had returned, with the S&P 500 gaining 2.2% in January, and in June of 2011, central bankers let their asset purchases end as scheduled.
  • Yet repeated shocks jolted the economy, with political upheaval in the Middle East sending oil prices soaring.
  • A tsunami and earthquake in Japan disrupted global manufacturing supply chains, and U.S. lawmakers struggled to reach an accord to raise the debt ceiling.
  • The S&P 500 peaked for the year on April 29 and fell 19% by Oct. 3.
  • The Fed responded with Operation twist, driving down bond yields by swapping short-term debt for long-term bonds, growing the economy 2%.

Take Away #6: Last year, Europe’s debt crisis flared again.

Key Facts and Figures:

  • The S&P 500 fell 4.2% from the start of April until June 29.
  • That month, the FOMC extended Operation twist and in September, it launched QE3.
  • The economy grew 1.7% for the year, below policy makers’ 2.2% to 2.7% forecast.

Take Away #7: This year, fiscal policy is again at the heart of the Fed’s concerns.

Key Facts and Figures:

  • March marked the start of $1.2 trillion in across-the-board Federal spending cuts to be spread over 10 years.
  • The cuts will trim 5% of the spending from domestic agencies and 8% from the Defense Dept. this fiscal year.
  • The cuts follow income-tax increases for the most affluent Americans and a two-percentage point increase in the payroll tax.

Take Away #8: The greatest “danger to growth” is tighter fiscal policy, said Dudley in a March 27 speech.

Key Facts and Figures:

  • “We could very well in the summertime start seeing the effects of the fiscal tax increase and spending cuts slow us down again,” said Joseph Gagnon a former Fed economist.

Take Away #9: There were signs of economic weakness even before last week’s payroll report.

Key Facts and Figures:

  • The Institute for Supply Management’s factory index for March fell more than forecast.
  • Its services gauge showed the slowest pace of expansion in seven months.
  • In contrast to previous quantitative easing programs, the Fed’s current round of asset purchases is open-ended.
  • There is no final date or amount specified in advance meaning policy makers can maintain stimulus until the economy gains a more stable footing.

*To view original article from www.bloomberg.com click here.

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