The Guest Blog

Farrell: Some Guidance From The Fed


At least now we know, thanks to Chicago Fed Chief Evans, that "unusually low for an extended period" means six months and not two years. He said it in a late-night interview the other day. So if Ben keeps saying rates will stay low for an extended period, we know we have six-plus months left of near-zero rates. The Fed will have to change the language before they can change the rates. They will go to something like rates will stay low "for a long time", or something equally clever.

Mr. Evans expanded on his economic views in the balance of the speech he gave. He wouldn't be surprised, he said, if the extended period of low rates "carried into 2011." Inflation, he feels, is well-contained, and any inflationary pressures are minimal. He expects unemployment to still be 9.25% by the end of this year and above 7% by the end of 2011. He expects the economy to expand about 3-3.5% this year and the impact from the Federal stimulus program will ease in the second half with the private sector picking up the slack.

Even though consumer spending has improved, consumption will not be as strong a force as in past recoveries.

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I agree with him on that last point especially.

Earlier this week, the market celebrated the report that consumer spending rose 0.3% month-over-month in February and that first-quarter consumer spending is on track for a 3.1% annual gain.

That would be the fastest rate of increase since the first quarter of 2007.

Such a gain would hint of stronger economic activity and perhaps higher rates. Trouble is, there was no gain in income in the month so the spending gain was fueled by a draw-down in savings from 3.4% of income in January to 3.1% for February. If savings hadn't been drawn down, spending would have been negative. Conclusion? - that the rate of spending is unsustainable. Incomes for February were flat, and "real" disposable income for January was off 0.4%. Real incomes are up about only 1% annually. A good employment number on Friday would be welcomed as it would imply higher wages at some point down the road. But that's at some point down the road.

The closely watched Case-Shiller Home Price Index, after seasonal adjustments, was up 0.3% month-over-month. That's eight months in a row and puts the index 3.9% above the May low. The "seasonally unadjusted" index was off 0.4%, but it is fairer to use the adjusted number. The FHA index of the same sort of stuff has fallen for two months. The question—and it is a big one—is what happens when the $8,000 tax credit expires, and also when does the "shadow" inventory come onto the market. Housing looks like it's trying to bottom, but the fact that high unemployment, anemic income growth, continued tight credit, and large inventories of homes mean a double dip in prices is a scary possibility.

Greece continues along its scary path. The government's auction of seven-year notes was poorly received. The bidding was meager and the bonds immediately sold off in the aftermarket. The government opened a twenty-year maturity to try to sell 1 billion Euros worth and received bids for only 390 million. The ten-year was trading close to 6.5%. It was 6%, which was considered bad news, only three weeks ago. The Wall Street Journal opined Wednesday that the "high yields Greece must pay to attract investors aren't sustainable - and the country has little hope of getting its interest costs and debt pile under control."

Amen to that.

Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.