All eyes will be on the Federal Reserve this week, when the central bank concludes its last policy meeting of the Ben Bernanke era. (Janet Yellen will succeed Bernanke as leader of the central bank on February 1st.) Before launching into what will happen at the upcoming meeting, it’s worth considering Ben Bernanke’s legacy during his seven years as Chairman of the Federal Reserve. Bernanke presided over one of the most turbulent periods in U.S. economic history and reviews of his performance have varied. Critics note that Bernanke has been a modern-day money printer, who missed the implication and severity of the subprime crisis in 2007. Who can forget his May 2007 comment, “We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” Woops!
But Bernanke fans see him as the savior of the financial system. After recognizing the magnitude of the crisis, he rose to the occasion, according to Martin Wolf of the Financial Times. “Bernanke acted decisively and effectively, slashing interest rates and sustaining credit.” Once the worst of the crisis passed, Bernanke realized that political fighting in DC had made the Federal Reserve the economy’s best hope for recovery. He resorted to extreme measures to prod growth: maintaining short term interest rates at zero and purchasing bonds for the Federal Reserve’s portfolio.
The naysayers contend that although these actions have not yet created inflation, they will down the road. They also say that unwinding these policies under Janet Yellen will lead to destabilizing events across the globe-just take a look at the emerging markets in the last week alone!
How history judges Bernanke will depend in large part on what happens in the next group of years. As the legacy of the Bernanke era develops, there is no doubt that the man will be seen as one of the most important Fed Chairmen in the 100-year history of the central bank.
And now, the week ahead!
At the December FOMC meeting, Fed officials began the process of unwinding their bond-buying program by reducing purchases by $10 billion dollars to $75 billion. Many believe that with economic activity picking up, the Fed may announce another $10 billion dollar cut to $65 billion at this week’s meeting. Others say that the weaker than expected December jobs report may encourage the Fed to hold off until the March meeting.
In addition to the FOMC, the first estimate of fourth quarter growth is expected to show that the economy grew by an annualized pace of 3.3 percent, despite the government shutdown and unusually bad weather. If the consensus comes in on target, the result would be slower than the previous quarter’s 4.1 percent, stronger than the 2013 real (inflation-adjusted) growth of 2-2.25 percent; and equal to the 60-year average.
Just a few weeks ago, economists predicted that US growth in 2014 would finally match the historic norm. The boost would come from an accelerating jobs recovery, waning household debt burdens and the fading of sequestration’s fiscal drag. The combination would encourage consumers and businesses to spend more freely, creating a virtuous economic cycle. That line of thought came under scrutiny last week, after disappointing Chinese manufacturing data prompted a sharp sell off in global equities and emerging market currencies.
As the rosy growth picture dimmed, some worried that companies might err on the side of caution and restrain spending. According to Factset, total capital expenditure by the non-financial companies in the S&P 500 index is forecast to rise by just 1.2 per cent in the 12 months to October, despite the fact that those companies are sitting atop $2.8 trillion in cash. Of course, corporate plans can shift quickly. If sales and growth pick up more than expected, businesses may go on a mini-spending spree.
MARKETS: Just a week and a half ago, the S&P 500 reached a new all-time high. Last week, worries about slowing growth in China, an emerging market melt down (led by a potential currency crisis in Argentina and exacerbated by the eventual withdrawal of Fed stimulus), and weakness in some blue chip earnings, sent stocks lower. Investors may have forgotten the word volatility, but before we get too nutty, the S&P 500 is now off 3.1 percent from its all-time high on Jan 15th. The classic definition of a correction is a drop of 10 percent or more from the peak. Meanwhile, risk-averse investors piled into highly rated government bonds (US and Japanese).
- DJIA: 15,879, down 3.5% on week, down 4.2% YTD (biggest weekly drop since 11/11)
- S&P 500: 1790, down 2.6% on week, down 3.1% YTD (biggest weekly drop since 6/12)
- NASDAQ: 4128, down 1.7% on week, down 1.2% YTD
- 10-Year Treasury yield: 2.74% (from 2.83% a week ago and a 7-week low)
- Mar Crude Oil: $96.64, up 2.1% on week
- April Gold: 1264.50, up 1% on week
- AAA Nat'l average price for gallon of regular Gas: $3.29 (from $3.32 a year ago)
THE WEEK AHEAD:
10:00 New Home Sales
AT&T, Ford, Pfizer, Yahoo
8:30 Durable Goods Orders
9:00 Case-Schiller Home Price Index
10:00 Consumer Confidence
2:00 Fed Meeting announcement (no press conference)
3M, Altria, Amazon, Colgate, Exxon Mobil, Google, UPS, Visa
8:30 Weekly Jobless Claims
8:30 Q4 GDP (1st estimate)
10:00 Pending Home Sales
Chevron, Master Card, Mattel
8:30 Personal Income and Spending
9:45 Chicago PMI
9:55 Consumer Sentiment
Janet Yellen becomes Fed Chair, the first woman to do so
A football game will be played in NJ