Unexplored Territory

The U.S. economy is in "unexplored territory" making it difficult for the Fed to get a handle on the outlook, said Federal Reserve board governor Donald Kohn.

"You need to keep in mind that our economy is in unexplored territory in many respects," Kohn said in a speech prepared for delivery to a banker's conference Wednesday in New York.

Kohn said there are "some unusual imbalances" in the U.S. economy, pointing out that the U.S. current account deficit is in excess of 6% of GDP and household savings have fallen to about 1%.

"We are buying far more than we produce, and the extra purchases come from importing more than we export, financed by net borrowing from abroad," Kohn said.

At the same time, low long-term interest rates have driven up housing prices.

Given this mix, Kohn said historic relationships of interest rates, exchange rates and house prices "may not be very good guides to future relationships."

All in all, "the risk of rapid adjustments and unusual configurations of asset price movements is higher than normal," Kohn concluded.

No kidding.
This is one of the few statements the FED has said lately that has made any sense at all. Unfortunately he blows it with this nonsense:

"I expect that the adjustment to more-sustainable patterns of spending and production and saving will occur in an orderly manner," Kohn said.

"The fundamentals, such as growth and inflation expectations and underlying financial conditions, appear to support continued good economic conditions," he said.

The Fed's continued focus on price stability and high unemployment "should help damp the economic fallout from unexpected developments," Kohn said.

This will be resolved in an orderly manner? That's news. Since when are 20 year excesses, insane credit creation, loose lending standards, and mammoth bubbles everywhere you look resolved in an "orderly manner"?

As for "good economic conditions" I violently disagree. We have horrid economic conditions. They only appear good and will continue to appear good only so long as the credit bubble keeps expanding. With housing and consumer spending constituting at least 2/3 of the economy, the "good conditions" will last only until the credit bubble supporting 0% loans for flipping insanely overvalued properties on both coasts as well as many major cities, collapses.

Finally, Kohn's assertion that the FED can simultaneously focus on both price stability and employment is ridiculous. It is hard enough to control one variable with economic policy. It is impossible to control two. Are these guys really that clueless or are they just saying things to prevent panic?

For all the enormous stimulus that was supplied: 1% Fed Funds rate, business tax credits, war stimulus, dividend reductions, tax cuts, election year stimulus, loose lending standards, cash out refis, etc etc etc, this economy produced zero private sector jobs under Bush. Now, with some of that stimulus being taken away, Kohn thinks we can have price stability and create jobs too.

In case you missed it, click here to see more silly comments by the FED and others.

BTW, the reason we are in "unexplored territory" is because of all the bubble management techniques and lack thereof by the FED. I am quite confident that once the housing bubble pops, the FED will once again be chasing its own tail.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/