What To Expect From The Fed On Wednesday

The Federal Reserve's rate setting committee meets on Wednesday - what should we expect from the statement? It's unlikely to be as explosive as the March 18 one (when despite clear signals to the contrary - including a very definitive statement by New York Fed President Bill Dudley 10 days earlier - the FOMC opted to significantly ramp up its mortgage purchase program and to start buying Treasurys to manipulate the yield curve); it could sound a little bit less concerned on the economic front, if the Beige Book and Fed Vice Chair Donald Kohn are anything to go by (but see above, one might want to be careful when reading Fed tea leaves.)

The Treasury market is inclined to push yields higher and test the Fed's mettle - already Friday, the 10-year yield briefly poked its head back above the 3% mark. The thinking is that the Fed will have to buy more than $300 billion worth of government debt to keep long-dated yields in check - and though the consensus seems to be for now that policy makers won't want to announce an expansion of the program, we've learnt our lesson on that (see once again above).

What's more, there are good reasons why the Fed might want to announce an expansion of its purchases now: if policy makers do see some kind of stabilization in the economy, why not double down and make sure the 10-year yield stays below 3% to ensure it stays that way? That's particularly as the consumer remains the weakest link: job losses will continue to rise - April's unemployment rate could touch 9% (it was 5% in April 2008, just for comparison) - and don't be fooled by those who say jobs are a "lagging indicator". That's only a comfort when there's another source of demand (typically exports) that can help get the economy growing again - but remember, this time, we're in a synchronized downturn so that historical leg of recovery won't be of much help.

A freaked-out consumer, terrified of losing his/her job, a global economy mired in a lack of demand - maybe adding another $750 billion to its Treasury purchase program might not be the worst thing the Fed could do.

A High-Stakes Gamble, In China and the U.S.

A long post on China Financial Markets brings a timely reminder not to get too euphoric about the recent turbo-charged economic numbers - everything from bank lending to car sales took a big jump in the first quarter - regardless of the official cheerleading. Key to whether China's economy is really recovering is whether all that money is creating jobs. Hard to know - but as the blog points out, even among officials there is the realization that the stimulus plan's impact could be temporary and a second round could still be necessary.
Meanwhile, in the U.S., talk of a second stimulus package - mooted as recently as in February - has all but withered away as the economy appears to have stopped falling in a straight line. That's no grounds for complacency, though - while China might see a W-shaped recovery, the risk in the U.S. is an L-shaped one (though U remains the favored forecast, for now).
China needs, as CFM notes, to see more private than public sector growth - but that doesn't seem to be happening, if the numbers quoted are correct. It still needs a prospering export industry, even as it seeks to reduce its dependency on foreign demand and become more reliant on domestic consumption. All the while, there's the issue of its massive foreign exchange reserves and how to manage them.
The U.S. problems are just as daunting: it has to do the reverse of the Chinese - reduce consumer demand and become more competitive in the global market place; it also has to reduce the share of its financial industry (which even last year accounted for 28% or so of domestic corporate profits) in the overall economy and find something to replace the lost business with. As consumer demand shrinks, Americans' reliance on debt should also diminish - doing away with the need for the securitization markets which lie at the heart of the financial crisis and which the authorities seem hellbent on restoring - even though if we've learnt one thing, it's the fallacy of the grandiose notion of democratizing credit.
The point is this: the Leviathans of the global economy - China and the U.S. - are both facing wrenching structural changes. Both governments are working on making the changes bearable and limiting the pain to their populations, but let's be realistic: it's a high-stakes gamble - there are no blue prints; plus the sobering thought that the last time we got out of a similar economic desaster, the world was engulfed in warfare.