Wednesday, 28 September 2005

Fed chairman speaks amid mixed housing and confidence data

Compared to the previous day, yesterday's news from the US was certainly more downbeat.

New home sales were relatively weak in August. At a seasonally-adjusted annual rate of 1.237 million, 9.9 percent less than the 1.373 million in July, itself revised down from an earlier-reported 1.41 million. House prices did rise slightly though.

The Conference Board's consumer confidence index fell to 86.6 in September from 105.5 in August. The present situation index decreased to 108.9 from 123.8 while the expectations index fell to 71.7 from 93.3 last month.

Confidence unexpectedly improved in Germany though. The Ifo institute's business confidence index rose to 96 from August's 94.6. However, Ifo said the 20 percent of replies received after the recent election tended to be more pessimistic.

The other interesting news item from yesterday was Federal Reserve chairman Alan Greenspan's speech to the annual meeting of the National Association for Business Economics in Chicago.

In perhaps what must be the greatest irony of economic policymaking, success at stabilization carries its own risks. Monetary policy--in fact, all economic policy--to the extent that it is successful over a prolonged period, will reduce economic variability and, hence, perceived credit risk and interest rate term premiums.

... Whatever the reason for narrowing credit spreads, and they differ from episode to episode, history cautions that extended periods of low concern about credit risk have invariably been followed by reversal, with an attendant fall in the prices of risky assets.

[B]ecause it is difficult to suppress growing market exuberance when the economic environment is perceived as more stable, a highly flexible system needs to be in place to rebalance an economy in which psychology and asset prices could change rapidly.

And what did the markets do immediately after his remarks? According to Reuters:

Prices for both U.S. stocks and government bonds rose a bit after his remarks as traders showed relief he had not signaled higher-than-expected interest rates ahead.

Irony indeed.

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