On June 27, 2012, Nightly Business Report interviewed Dennis Lockhart, President of the Atlanta Federal Reserve about the U.S. economy. During the interview, Lockhart indicated that the economic anecdotes he hears indicate conditions are better than the data show, so he sees no reason to pull out the "big guns" of monetary policy. However, QE3, a third round of quantitative easing, remains an option if the unemployment rate worsens and/or prices head into disinflation or deflation similar to what happened in 2010.
Lockhart believes that Europe's sovereign debt woes could soften U.S. growth rates, but it is "far-fetched" to believe Europe could plunge the U.S. into recession. He noted that there is not much else the Federal Reserve can do to help Europe beyond the currency swap lines that are already established. The Federal Reserve would be forced to act if Europe's issues created widespread financial instability and contagion in the global economy.
Finally, Lockhart was quite clear that Congress and the Administration completely own the coming "fiscal cliff." Monetary policy cannot be used to make up for fiscal mistakes.
This interview was interesting because it held out the expectation of imminently better economic data along with the promise of further monetary easing if conditions do worsen. This interview was yet another reminder that the Federal Reserve is ready to roll out more easing if necessary (also see "Yellen's Case For More Easing Primes Fed To Act Sooner Than Later"). This polarity is also a great metaphor for an S&P 500 (SPY) that has traded in a waiting pattern since early May.(click to enlarge)
The S&P 500 has recently traded in a 100-point holding pattern well-contained by the 2011 high and closeSource: FreeStockCharts.com
The upcoming July earnings season will likely provide a turning point, up or down, but the poor performance of material and industrial stocks (cyclicals) has me extremely wary of what is to come.
Be careful out there!
Additional disclosure: SSO shares are shorter-term than SDS