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Thursday, November 8, 2007

Stagcession and Inflation, Bernanke's not on board, but he's on the tarmac with his suitcase

Now I'm worried. Ben Bernanke seems to agree with me. Inflation AND recession. (Blog or better, check out the two podcasts on the subject via the link to the right). Not that he would speak so clearly, particularly when he has lots of covering of his backside to attend to, but the tone changed in testimony before the Joint Economic Committee and Chuck Schumer today.

Particularly note that further rate cuts are not indicated by either his long-term imagination that economic fundamentals will eventually come around, nor by his concerns for short- and long-term inflation. In spite of this, you don't need to be a Fed watcher to know that further interest rate cuts are coming to benefit the financial sector and credit markets.

Bernanke's testimony, in part:
"[The FOMC does} not see the recent growth performance as likely to be sustained in the near term .... the contraction in housing-related activity seem[s] likely to intensify. Indicators of overall consumer sentiment suggested that household spending [will] grow more slowly, a reading consistent with the expected effects of higher energy prices, tighter credit, and continuing weakness in housing.


" [H]eightened uncertainty about economic prospects could lead business spending to
decelerate as well. Overall, the Committee expect[s] that the growth of economic activity [will] slow noticeably in the fourth quarter from its third-quarter rate.

"Growth [is] seen as remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction began to wane.


"The Committee also [sees] downside risks to this projection: One such risk was that
financial market conditions would fail to improve or even worsen, causing credit conditions to become even more restrictive than expected. Another risk [is] that, in light of the problems in mortgage markets and the large inventories of unsold homes, house prices might weaken more than expected, which could further reduce consumers’ willingness to spend and increase investors’ concerns about mortgage credit.


"[The] inflation outlook was also seen as subject to important upside risks. In particular, prices of crude oil and other commodities had increased sharply in recent weeks, and the foreign exchange value of the dollar had weakened. These factors were likely to increase overall inflation in the short run and, should inflation expectations become unmoored, had the potential to boost inflation in the longer run as well."
His recommendations for policy changes and his belated oversight efforts come long after the horse is out of the barn. His analysis of the problems comes fully two years after they would have been useful.

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