"The worst has passed"
I remember visiting the NY Fed in November 2006. The chief economist of the central bank's branch presented his economic outlook. His (the Fed's) view was that the worst in the housing market was behind us. To underscore this opinion, he showed the graph of Toll Brothers, one of the major house builders in the States. Toll Brothers had been rebounding from 22 to above 30 USD, a sign for the Fed that the worst was over. It was quite odd to witness the Fed making a bullish opinion based on the stock price of a company.
Today, we see that the Fed is again becoming optimistic, with statements that the worst is behind us. Bloomberg writes:
The Federal Reserve refrained from increasing purchases of Treasuries and mortgage securities, signaling the worst of the recession may be over.
Bernanke said in an interview with CBS’s “60 Minutes” program that aired March 15 that the Fed’s efforts so far had brought down mortgage rates, among evidence of “green shoots” in some markets.
A month later, the Fed chief gave a speech saying there were signs that the “sharp decline” in the economy was slowing, indicating a potential “first step” toward a recovery. His outlook is partly supported today by a 2.2 percent gain in consumer spending in the first quarter, the most in two years. Consumer spending accounts for 70 percent of the economy.
Officials cut the benchmark lending rate to as low as zero in December and switched to using direct bond purchases and loans to support credit markets.
“The Fed is following an extraordinarily expansionary policy,”
, a senior fellow at the Cato Institute in Washington and former president of the St. Louis Fed, said before policy makers issued their statement. “There is I think accumulating evidence that we may not be all that far from a bottom” of the contraction. Poole spoke in an interview with Bloomberg Radio.
Now I hope that the Fed's 'bullish' view is not based on a similar observation as in 2006 of stock prices, not using Toll Brothers this time but the S&P500 recent performance. The market rally is indeed rather impressive, but not unusual after one of the sharpest corrections in history. The staying power of this bear market rally remains to be seen.
Today the Case Shiller housing index was released. It didn't confirm Bernanke's optimism. Housing prices in some areas in the US have halved. The average drop since the top is around a third of its peak value. Miami, San Francisco and Detroit are amongst the hardest hit by the real estate crisis.
So the Fed seems to mimick the 'Toll Brothers act' of the NY Fed. Only, in 2006 when leaving the Fed building, the economist whispered to us "I hope you believed my propaganda" in an effort to keep his own credibility and to warn us for the things to come.