Macroeconomics, many economists agree, is as much an art as a science. And sometimes it requires the 'reading between the lines' skills of a Kremlinologist during the Cold War.Here's my reading between the lines analysis of recent Fed statements on housing: more housing-related write-offs (and pain) for certain banks and others with mortgage-backed debt.
Yellen, Bernanke speeches: Signals?
The evidence: first, San Francisco Federal Reserve President Janet Yellen, currently a non-voting member on the Fed's Open Market Committee, delivers a low-key, candid-but-not-alarmist speech Monday to the San Diego Economics Roundtable in which she warns that "things could get worse before they get better" and that problems affecting the financial system could stick around "for some time."
Economist David Wang said Yellen's speech could be interpreted "as her staking out a claim on the dovish [interest rate cut] end of the Fed" were it not for the fact that the measured, always dispassionate Yellen "is not known for politicking or embellished commentary."
Wang said had Yellen's comments stood in isolation, "one wouldn't read much into it." However, on Tuesday Fed Chairman Ben Bernanke, at an FDIC conference in Arlington, Va., said the Fed may extend securities dealers' access to direct loans from the Fed into 2009 as long as emergency conditions "continue to prevail." Bernanke added the Fed would "take a leading" role in any liquidation process for a failing investment bank.
Wang said, taken together, the Fed, in Wang's interpretation, "is sending a signal that we are not done with the housing-related asset defaults."
"I don't think we're going to see a batch of write-offs as large as the previous cycles, but from Yellen's and Bernanke's comments, I think one can reasonably conclude they're bracing the stock and bond markets for additional bad news," Wang said. "My conclusion assumes the Fed may know a little more than the markets know at this time. My sense is, they do."
Economic Analysis: As Wang noted, reading between the lines, when two Fed members take pains to state that 'all is not 100% well, yet' and that the Fed remains at the ready to address adverse events, expect more housing-related turbulence ahead.
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