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The Elections, the Fed, and Jobs Data: Next Week the Fog Lifts a Bit

12:00 AM, Oct 30, 2010 • By IRWIN M. STELZER
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On to Wednesday. The Fed will act to shore up what it sees as a faltering recovery, and prevent a dangerous round of deflation. Bernanke has already indicated that he will launch another round of dollar-printing, or quantitative easing or, in the vernacular, QE2. This will drive down long-term interest and mortgage rates. Indeed, the mere expectation of QE2 already has caused the yield on 10-year Treasuries to fall from 4 percent in April to 2.6 percent, and mortgage rates to hit an almost 50-year low. However, many economists and, more important, presidents of three Federal Reserve regional banks, say there is so much excess manufacturing and labor capacity in the economy that trying to spur investment by printing money is a feckless enterprise that will only produce unacceptable inflation in the long run. But running the presses will put added pressure on the dollar just before the president heads for the November 11-12 meeting of the G20 in Seoul to argue against competitive currency devaluations.  

Bernanke has not revealed whether QE2 will be a massive $2 trillion vessel (some want the super-luxury $4 trillion craft), or a fleet of smaller, $250 billion ships, launched quarterly as conditions seem to warrant. The latter course, which rumor has it is the most likely, is the more cautious, but it does leave the markets in a continuing state of uncertainty, as it waits for Bernanke to consult his muse every quarter.

Finally, on Friday we will know whether the jobs market is improving. Signs are mixed. The economy grew at a 2 percent annual rate in the third quarter, not fast enough to create jobs, but better than a decline into a double-dip recession. Consumers seem to be less nervous, profits are reasonably good, corporations have $2 trillion in cash to spend. But the housing market remains a mess, with sales well below last year’s already-depressed levels, and prices sliding at a rate that some analysts say will take them to below last-year’s levels in a few months. Worse still, the White House and the Congress have not figured out what to do with Freddie Mac and Fannie Mae, the bust government agencies that are providing almost all the new mortgages written. Throw in the confusion created by the banks’ sloppy paper-work that has stalled repossessions and the subsequent sale of these homes, and it might be a long time before the residential construction industry begins creating jobs.

None of this means that you will be able to pick up this column next week and get a definitive read on America’s near- and medium-term economic future. This economist possesses neither the skills nor the courage to offer one. But the crystal ball will be a bit less hazy. That, I trust, gives you something to look forward to as you watch the elections, the Fed, and the jobs data.

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