June 18: The Fed's Dilemma - Economic Highlights

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The backdrop for today's market action is the start of the countdown to the Fed announcement and Bernanke news conference on Wednesday afternoon as the two-day FOMC meeting gets underway today. On the data front, this morning's moderately positive Housing Starts and broadly in-line CPI readings provide further confirmation that housing remains the economy's strong point and pricing pressures remain muted.

The Housing Starts reading was a bit on the weak side, but it nevertheless builds on the very strong homebuilder sentiment reading from Monday and the overall positive narrative for the sector that has firmly taken roots now. Those in the market that don't see the Fed tapering any time soon point to the potential negative effects that higher interest rates resulting from tapering would have on the sector.

This is a plausible argument, but can't one make the counter argument that the Fed may be seeing the housing recovery as sustainable enough to not need too much monetary support. One could reasonably expect that the pent up demand for housing, resulting from years of underinvestment and continued household formations, will keep the housing recovery in place even if interest rates moved up a bit from current historically low levels.

I don't expect the Fed to show its hand on the taper question in tomorrow's post-meeting statement. But even if Bernanke is able to dodge some direct questions on the subject in the news conference after the meeting, he has to provide a roadmap for the markets. He doesn't have a lot of time left at the Fed - it has now even been confirmed by President Obama that Bernanke wouldn't be at the Fed come January 2014. The actual taper process may not start now, but the Fed can't afford to keep the markets in the current state of suspended animation. This isn't the legacy that Bernanke - the most transparent Fed Chairman in history - would like to leave behind



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This article appears in: Investing , Economy

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