One foot on the brake and one on the gas


INDICATOR: Second Revision of First Quarter GDP

KEY DATA: GDP: 1.8% (down from 2.4%)

IN A NUTSHELL: "With economic growth so modest, the Fed members will have a lot of problems trying to explain why it's almost time to take the pedal off the metal."

WHAT IT MEANS: I almost never write up the second revision to GDP as it comes just as the next quarter is ending. But I could not pass up the new numbers describing economic growth in the winter. Basically, the economy grew at a pace during the first quarter that is really disconcerting, especially given the pathetic 0.4% rate posted in the last three months of 2012. Just about all components were seen as growing more slowly, led by a sharp downward revision to consumer spending. Households still bought goods and services, just at a more moderate pace than initially thought. Business spending and exports were also weaker, indicating that the key private sector components just didn't do a whole lot.

MARKETS AND FED POLICY IMPLICATIONS: With the Fed Chairman opening his mouth and creating total confusion, this report has to cause great consternation at the Fed. How the members can explain that last week was a good time to announce that by the end of the year quantitative easing would start to end is beyond me. Unless Ben Bernanke has become a contortionist, reverse is likely to be the Fed's favorite gear for a while. I have argued constantly that the Fed has two errors that they could make: Ending QE too soon and slowing growth too much or not ending it soon enough and causing inflation to accelerate sharply. I maintained that the risk to growth of taking the pedal off the metal too soon far outweighed the risk of high inflation, which I believe is a minimal threat. It looks like the Fed could be risking ending QE too soon, something I said last week even before this report came out. The only thing working on the Fed's side is that the downward revision could make it easier to post a better than expected second quarter growth rate. But one good number doesn't cut it and we will not get the second revision to summer growth until the end of December. So what is the hurry? In the early 1990s, the Chairman of a bank I worked for called the FOMC the Federal Open Mouth Committee and that was when the members said very little. That description is much more accurate today. I have expressed my dismay about the Fed's attempts at "better communication", saying that conditions change too often to make that goal attainable. The past week shows how difficult and self-defeating it is to attempt that.

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