- U.S. equity futures are pointing lower and the U.S. dollar is rising as investors weigh the rosier than expected forecast the Fed offered last week for U.S. growth along with China’s central bank decision to reign in its shadow banking market of private lending that has sent interbank lending rates soaring to record highs as Beijing attempts to shake out underlying problems in their lending market.
Last week U.S equities saw the largest two day decline since November 2012 following Fed Reserve Chairman Ben Bernanke’s remarks suggesting the Fed could begin to ”moderate” or taper its bond purchases later this year, if its forecasts for inflation moves to their 2 percent longer term goal and the unemployment rate falls to around 7 percent as Fed policymakers forecast.
This morning the yield on 10-year Treasury notes rose to 2.62 percent, the highest level since early August 2011. The current rate for 30 year mortgages has historically been about 1.7 to 2 percent higher than the 10-year Treasury.
Bernanke and the Fed May Be”Driving In The Fog” says Pimco’s Bill Gross
Pimco’s Bill Gross, who runs PIMCO’s $270.0 billion Total Return Fund (PTTRX), said that Fed Chairman Ben Bernanke and the Fed are “driving in the fog” as they guide the Fed’s quantitative easing program.
“We think that the chairman and the Fed has taken a very much of a cyclical type of view. He blames lower growth basically on fiscal austerity” Gross told Bloomberg T.V. last Wednesday.
“He expects towards the end of the year once that’s gone that all of a sudden the economy will be growing at 3 percent. He blames housing prices moving up on homeowners that simply like higher home prices as opposed to emphasizing the mortgage rate which is really what has provided the lift in the first place” Gross said.
“So to a certain extent his driving analogy in which he talked about pulling back on the accelerator, I think he may be driving in a fog. I think the Fed itself may be driving in a fog” Gross said.
“To think that it’s a cyclical as opposed to a structural problem in terms of our economy, I simply think and I think Pimco simply thinks that real growth to lower unemployment below 7 percent is a long shot over the next 12-18 months” Gross admitted.
Gross believes structural issues in the U.S. economy including globalization, shifting demographics (aging population), and new technology that eliminates the need for workers are some of the structural issues that make it challenging for the U.S. labor market.
In his closing remarks last Wednesday during the conclusion of the Fed meeting, Bernanke explained that the Fed Committee will continue to evaluate economic conditions and risks as they “evolve” while noting that the downside risks to the outlook for the economy and labor market have diminished since the fall.
Michelle Meyer, head U.S. economist with Merrill Lynch, told Bloomberg T.V. last week that she thinks the market is probably looking for tapering a bit earlier than what we will actually see.
Meyer believes the market learned a good lesson last week from Bernanke as he addressed Fed policy amid growing nervousness about the potential for tapering of the Fed’s $85 billion monthly bond buying program.
“He (Bernanke) thinks the downside risks have diminished. And QE3 when it was put into place last fall was partly in place because there was a real possibility that the economy was going to fall back into recession because of the fiscal cliff ” Meyer said.
“The economy is handling the fiscal tightening better than he expected; he is pointing to stronger underlying dynamics. We’re not off to the races in the economy but perhaps it could warrant easing less” Meyer said.
“I think that was the point he was trying to make to the markets: still data dependent and we need to see signs of healing but we don’t need to see the output gab closed to start tapering” Meyer concluded.