The views expressed in this column are those of the author and not SVB Financial Group.
There must be some misunderstanding
There must be some kind of mistake
Followers of the Fed have always been challenged with interpreting its written or spoken word. From the early Greenspan days, Fed-watchers spent countless hours scouring speeches, testimonies and written releases, parsing every single word in search for clues of coming Fed actions. (Imagine a world where the Fed doesn't even announce their target interest rate and you can see the need for such specificity.)
For the Fed's part, game theory tells us that signifying an action can have more effect than the action itself. Thus, the need to at times be opaque and at other times, "talk the market" in one direction or another.
This week, we've gone to an entirely new level.
Even prior to Bernanke's appointment as the grand pooh-bah of monetary action, he has been seen as a different sort. Most Fed-watchers believe he wanted more clarity in Fed communications as well as less authority, in the sense that he wanted FOMC votes to be just that, rather than the rubber-stamping process it surely was under Greenspan.
Today there is much evidence of this attitude, including the treatment of Kansas City Fed President Thomas Hoenig's dissention as outlined in our most recent quarterly commentary.
Last week Bernanke described his outlook for the economy as "unusually uncertain" This poetic bit of language precisely illustrates the fact that our economy cannot be defined today.
Consumers are "unusually uncertain" about two things: the stability of their jobs (if they have one) and the size of their wealth.
Homeowners are "unusually uncertain" about the value of their homes.
Employers are "unusually uncertain" about a lot of things, including whether their customers will show up tomorrow.
The government is "unusually uncertain" regarding appropriate economic policies.
Cross-border transactors are "unusually uncertain" about currency movements.
Price-watchers are "unusually uncertain" whether to be concerned about inflation or deflation.
So, why shouldn't the Fed feel "unusually uncertain" today?
Nonetheless, the markets took this uncertainty as a sign the Fed is not in control and does not know what to do next. Unfortunately, that's typically the case.
No one can say with certainty where our economy is headed or what exact policies will get us there. Nor has this ever been the case. Instead, Adam Smith's "invisible hand" guides economic participants who, as human nature dictates, act in their own best interests. It's up to the government to create and commit to the ground rules that will influence this activity going forward. Instead, legislation being enacted today contains too many "unusually uncertain" rules driving these participants to the sidelines.
I have said for a long time this will be the case for the consumer until there is some definition around how the government will interact with the mortgage market. I continue to believe this to be the case.
Until then, we will all be surviving in this "unusually uncertain" time period.
President Obama signed into law the "Dodd-Frank Wall Street Reform and Consumer Protection Act," which is the first step in the establishment of a new regulatory regime for banks and other financial market participants. It will take years before we know the true extent and affect of this legislation; however unintended consequences are already arising.
Sales of U.S. previously-owned homes fell in June for a second month, adding to evidence the market will slump as the effects of a federal tax credit fade. Purchases of existing houses dropped a less-than-forecast 5.1 percent to a 5.37 million annual rate, according to figures from the National Association of Realtors.
The index of leading indicators fell 0.2 percent in June, the second decline in three months. The decrease in the New York-based Conference Board's gauge of the prospects for the economy in the next three to six months compares with the median estimate for a 0.3 percent decline in a Bloomberg News survey of economists and follows a 0.5 percent gain in May.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value.