A Fresh Surge In Uncertainty

Ken Rogoff of Harvard tells Bloomberg that the Fed will likely roll out a new round of quantitative easing. “They certainly should do something right away,” says the co-author of This Time Is Different: Eight Centuries of Financial Folly.

The opportunity to announce QE3 arrives later today, when the central bank is scheduled to dispatch its standard press release in the wake of the scheduled FOMC meeting. “Some market participants will be looking to gauge whether the Fed will give any clues as to the timing of a possible [third round of quantitative easing], given the massive falls in equity markets in recent days,” Michael Hewson, analyst at CMC Markets, advises via MarketWatch. “However, it could well be the only thing the Fed are likely to do is downgrade their growth forecasts for the U.S. economy, while reiterating their intention to keep rates low for an extended period, given that their monetary policy toolbox is starting to look a little depleted.”
It’s safe to say that there’s no shortage of skepticism about the efficacy of additional Fed action. But if the measure of deciding if Fed action is warranted is the risk of new downturn, one economics professor at Stanford lays the foundation for thinking that the macro threat is building. “The U.S. and European debt crisis of the last week have generated massive economic uncertainty,” writes Nicholas Bloom. “One measure of the economic uncertainty – the VIX index of stock-market volatility – has jumped to levels not seen since the crash of 2008.” Although he’s careful to note that no one’s really sure what comes next, he goes on to note:

I have studied 16 previous uncertainty shocks – events like 9/11, the Cuban Missile Crisis, the Assassination of JFK – and the only certain thing about these is they lead to large short-run recessions (Bloom, 2009).

Surely the double-dip threat is elevated, but it’s not yet obvious in the data that another recession is a done deal. Granted, it’ll be a fine line for distinguishing in real time between the slow growth of late and a new recession. The old problem that economic reports arrive with a considerable lag is one sticking point. Meantime, it’s also true that no one variable has a monopoly on flawlessly predicting recessions. Every predictor is imperfect. The trouble is that you’re never quite sure when and where the imperfection will arise. That leads to the reasonable conclusion that reviewing a mix of predictors is the only game in time. On that score, a broad reading of the numbers in hand still presents a mixed bag on the outlook. It’s not a particularly encouraging mixed bag, but neither have we fallen off the statistical cliff as of yet.
Does the jump in uncertainty trump the statistical ambiguity? Bloom’s work is intriguing and his insights deserve serious attention. But uncertainty, aside from being a rather nebulous concept, is just one factor, if you will and it’s not obvious that we should bet the farm on it.
That leaves us with the usual task of focusing on the incoming data and reassessing the macro outlook, day by day. Unfortunately, that’s going to take time as we await fresh U.S. numbers.
The next major release comes on Thursday with the update on weekly jobless claims. When we last checked in on this report, the news was ambiguous in terms of whether a fresh bout of good news was brewing. But a bit of salvation came a day later when the government reported that private-sector job growth perked up last month. Yes, that looks like old news in the wake of yesterday’s market slide. And the consensus forecast for Thursday’s jobless claims calls for an uptick, according to Briefing.com.
This much is clear: the crowd probably has no tolerance at this point for anything other than upside surprises with the labor market. That’s a tough standard to satisfy at this point, although not necessarily impossible. Meanwhile, there’s that uncertainty thing. Yup, this is going to be a nail biter.
But first up: Does the Fed have anything useful to say? Stay tuned…