What do policy-makers tell us with their comments? Often, not much. But markets often need government officials to state the obvious to cause a reaction. Sometimes markets do not have enough confidence in the numbers to make their own decisions. Nevertheless, when Fed officials state the obvious we know for sure that they have taken note.
Ben Bernanke stated that the economy will “slow noticeably”. What does it take for a slowing economy to be noticed? Housing in the tank, oil prices near $100 per barrel, and slowing consumer sales would seem to be enough. What were the give-away signs for Bernanke? Asked about stagflation, Bernanke stated,”we don’t see anything approaching the period in the 1970’s”. This is small comfort for home owners or consumers who use food and energy.
ECB head Trichet stated “undoubtedly sharp and abrupt brutal moves are never welcome”.” This is not the type of statement that will calm markets. While the dollar move has been especially strong in the last three months, the decline should not have been unanticipated. The strong decline came with the credit crunch in August. This was the catalyst. The change has not been abrupt as much as relentless. The issue is what can the ECB do about this? With inflation moving upward, a rate decline is not feasible.
Official comments are often just catalysts for what is being displayed in the numbers. Unfortunately, there are limits to what governments can do in the current situation.
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