Investors Seek Clarity Not Confusion from Bernanke

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APFederal Reserve Chairman Ben Bernanke
By Alan Wheatley

LONDON -- Like a father who has told his son the tooth fairy doesn't exist, Ben Bernanke must find a way to soothe investors who feel betrayed since he told them it was also a fantasy to hope he might keep printing free money for ever more.

Financial markets, of course, knew deep down that the Federal Reserve would have to start withdrawing its extraordinary monetary stimulus once the U.S. economy was out of the emergency ward.

But bond yields have climbed and share prices have sagged globally since the Fed chairman shocked investors on May 22 by saying the bank might "take a step down" in the pace of bond purchases in coming months.

Bernanke has the opportunity to recalibrate expectations when he briefs the media on Wednesday after a two-day meeting of the central bank's policy-making panel.

The Fed chief can't disavow last month's remarks. But, given the scale of the subsequent asset-market sell-off, he is expected to indicate that the economy is still too poorly to justify slowing the pace of bond buying, now $85 billion a month, right away.

And as for raising interest rates from near zero, that day remains distant.

"The confusion since May 22 will force them to make clarity a high priority at this upcoming meeting," said Ward McCarthy, chief financial economist at Jefferies in New York.

A Tapering Timetable

To that end, McCarthy speculated that the Fed might map out its base-case starting date for reducing bond buying along with a preliminary schedule of the wind-down, subject to the usual caveats on growth, inflation and financial markets.

"The problem is they can't use a light switch. They have to have discretion because nobody knows what the future bears, so they will never give up their flexibility - and nor should they," he said.

Manufacturing surveys from New York and Philadelphia due this week, as well as a national poll of homebuilders, are unlikely to suggest the need for a swift tapering of the Fed's accommodative stance.

McCarthy reckons the economy is expanding at a pace of about 2 percent, but that might falter unless inventory accumulation picks up.

Indeed, many economists expect the Fed to nudge down its central forecasts for 2013 growth and inflation.

"All in all, conditions for a self-sustaining recovery are not yet in place," said Douglas Roberts, an economist with Standard Life in Edinburgh. "If anything, weak inflationary pressures are giving the Fed a clear mandate to focus on getting economic growth up and running again."

G8 Optimism, PMI Pessimism

The tightening in financial conditions represented by lower share prices and higher bond yields is an additional headwind for a global economy still growing well below trend due to the after effects of the great financial crisis.

But leaders of the Group of Eight major powers, meeting in Northern Ireland on Monday and Tuesday, can be expected to try to bolster confidence by accentuating the positive.
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The G8 communique was likely to reflect a "somewhat better situation in the global economy" than the year before, according to a senior European official.

Somewhat is the operative word. Data provider Markit's purchasing managers' index for China on Thursday is likely to provide further evidence of a slowdown in the world's second-largest economy.

The eurozone's PMI is expected to have edged higher in June but will still point to shrinking output in the 17-country bloc zone, which has been in recession for the past six quarters.

"The pace of deterioration has declined. That's the best thing that can be said," according to Jens Larsen, chief European economist at Royal Bank of Canada in London. Recent indicators were consistent with a modest recovery in either the third or fourth quarter, he said.

"It's not a lot more than that. I'm not particularly confident about the euro area. Equally, I feel more comfortable that the euro area is not heading south at a pretty fast rate and the chances of a large-scale monetary response from the ECB are now pretty small," Larsen said.

9 Numbers That'll Tell You How the Economy's Really Doing
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Investors Seek Clarity Not Confusion from Bernanke
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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