Nearly every investor in the world wants to know when the Federal Reserve will start to tighten its easy-money policy.
So, apparently, does the Fed itself.
If financial markets didn’t retch in response to every worrisome signal from the Fed, the worldwide confusion over the deliberations of a bunch of suits in Washington would be comical. The stakes are extremely high, however. A change in Fed policy won’t just affect U.S. markets. Investors in Europe, Asia and many other markets could end up blindsided if they don’t prepare for a shift. The future actions of the U.S. central banks even seem partly responsible for a plunge in the value of the Indian rupee, along with pullbacks in other emerging markets.
Fed critics argue that the central bank needs to clarify its intentions, to reduce uncertainty in the market and speculation over what might or might not happen. Sounds sensible — but you try it. Here’s what you’ve got to work with:
If you’re Fed chairman Ben Bernanke and you begin to “taper” the quantitative easing program that has pushed interest rates down and stock prices up, you’ll spook investors who aren’t sure the economy is ready to stand on its own. So you’re scouring every nugget of economic data to figure out if the economy will survive a Fed pullback.
A primary goal of QE is to accelerate the housing recovery. There are some signs that has happened. Home prices bottomed out in 2012 and have been rising by double-digits, year over year. The latest data show existing home sales — which account for more than 90% of the housing market — are up 17% from the levels of last summer. Home Depot (HD) and Lowe’s (LOW) just reported blistering earnings, thanks to home owners spending more money on appliances, fixtures and home-improvement gear.
So QE seems to be working, which suggest it’s a good time to start reeling it in. But wait. The latest data also show that new-home sales, which have less of a lag than the existing-home numbers and better reflect real-time conditions, fell unexpectedly to a nine-month low. That might be a fluke, but it might also be the first tangible sign that rising mortgage rates are slowing the housing recovery before it gathers much momentum. So instead of tighter money, perhaps the economy needs even looser money.
Mixed consumer messages
What do consumers seem to be saying? Eh, they’re pretty confused themselves. Consumer confidence has been up – and down – with the numbers often zigging when forecasters expect them to zag. Yet confidence numbers can be a bit flaky, because they reflect what consumers say, not necessarily what they do.
So what’s the message from consumers when it comes to how they spend their money? Maybe you can guess. Car sales have been strong, with signs that “pent-up demand”— a need for replacement products after sharp spending cutbacks during recent years — should propel sales for some time. But aside from home-related goods, spending on most other things has been patchy, with big retailers including Walmart (WMT), Macy’s (M), Target (TGT) and Staples (SPLS) reporting disappointing sales recently. With weak growth in incomes and tax hikes taking a bigger bite out of paychecks this year, consumers don’t seem to have the money to boost spending by much. And there’s no new income source on the horizon.
Most other indicators reflect a variation on the same theme: They’re up, then down, making it hard to tell if the economy is gathering steam or fading.
For the Fed, the trick is to put the brakes on QE in the early stages of an economic rebound, because waiting too long could flood the economy with too much money, causing inflation, asset bubbles or worse. Yet it’s remarkably tricky to know in real time where the economy is headed, which is why the Fed and many other forecasters have misjudged the recovery during the past few years.
As investors everywhere know, Bernanke has suggested the Fed could begin to tighten its policy when top decisionmakers meet in September or, if not then, December. It’s understandable that everybody wants more clarity as the target dates draw nearer. But the Fed itself probably doesn’t know what it’s going to do, given the conflicting picture painted by all the data it looks at. And when the Fed finally does change policy, it will probably be a marginal call, with nearly as many voting members of the policy committee casting their ballots one way as the other.
Maybe some new data will surface during the next few weeks that will show the economy moving more definitively in one direction than another. But uncertainty has been the norm for the past four years, and there’s no reason it should end now. If the Fed knew something we didn’t, they’d probably be dying to tell us and end the speculative circus.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.