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Tim Mazanec
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  • Cap. U. & FOMC 1 comment
    Dec 16, 2009 10:00 AM
    Some of the common discussion points centered on the FOMC this decade include:
     
    • They were too slow to recognize the economic weakness that began in 2000
    • They were too slow to raise rates when the economy showed improvement in 2003
    •  And then there is the whole discussion on the credit crises that began in 2007
     
    This begs the question as to whether or not the FOMC is going to be too accommodative for too long in 2010? 
     
    As we saw yesterday the Capacity Utilization rate rebounded to 71.3% for November. This is a nice rebound from the 68.1% low that occurred this past June.  For comparison sake it is still below the low that occurred during the 2002 recession of 73.6.% and is approximately 10% below its norm. 
     
    Still it marks the 5th consecutive month of improvement in Capacity Utilization.  After all the FOMC did state at their Nov. 4th meeting that "Information received…suggests that economic activity has continued to pick up". 
     
    Granted that today’s central bankers do not like to disrupt markets. Whether it’s the FOMC or the ECB or the BOJ they prefer to telegraph their policy decisions. Therefore any adjustment in policy or in the Statement today would come as a surprise. That said I’d still prefer to see a 5 to 10bps removal of accommodation by the FOMC today.
     
    Why? See the charts below.

     
    Capacity Utilization is a comprehensive figure that is derived by the Fed. It is not produced by a 3rd party or another government entity that the market spends hours debating over. Capacity Utilization is released and there is almost no debate over the figures.  In short when manufacturing gets going again it is hard to dispute otherwise.

    The chart above shows that the discussion points on the slowing economy in 2000 and the rebounding economy in 2003 were met with policy decisions that at best can labeled as 'laggard' in nature.
     


    Now that we've seen 5 consecutive months of improvement in Capacity Utilization should the FOMC not be that much closer to removing some of their extraordinary policy accommodation? 

    A removal of 5 to 10bps in policy today would still keep the federal funds rate at extraordinary low levels.  More importantly though it would signal that the FOMC acknowledges that there is strength in the economy and that their policy will not be as laggard in the coming years when the economy shows continued strength.
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    Tim has made a very good point on the Cap U data and the FOMC as a laggard. It makes sense to slowly withdraw stimulus on a measured basis.
    16 Dec 2009, 10:30 AM Reply Like
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