A winter’s tale of a policy error: James Saft

February 13, 2014

Feb 13 (Reuters) – An exceptionally cold winter in much of
the U.S. is slowing the economy, but may also be laying a trap
for the Federal Reserve.

Where I live in Alabama we just had our coldest January in
about 30 years. That’s good luck for my kids, who are now on
their third straight day off of school, but bad news for growth
in the large parts of the country which have suffered cold, snow
and blackouts.

It is also raises risks for the Fed, making it more likely
that they may misread the strength of the economy and make what
could be a very expensive policy error.

There are two levels to this story. The first, more
straightforward, is the fact that people stuck shivering in
their cars, or eating day-old bread at home, are not earning,
making or buying things in their usual way. It’s hard to get a
hard number for the total costs, which is well into the
billions, but easy to see the damage in the economic data.

Cold weather got the blame for a disappointing pending home
sales figure for December which saw a bigger-than-expected drop
when announced late last month.

Retail sales data were released today, and again weather
came in for much of the blame for being down in January by 0.4
percent. Sales for December were also revised lower, to a fall
of 0.1 percent. While doubtless weather played a role, we have
to note that Internet sales fell by 0.3 percent as well. That
indicates more widespread weakness.

Still, everyone from automakers to restaurants to clothing
stores are using the weather as an explanation for poor sales,
and by and large the Fed is buying into that analysis. For one
thing they are living it – Janet Yellen’s second day of
testimony before Congress was scrubbed today due to snow.

Speaking before lawmakers on Tuesday she indicated that
recent soft jobs data wouldn’t, by itself, prompt the Fed to
suspend or slow the taper.

“We have to very careful not to jump to conclusions
interpreting what those reports mean,” she said. “There were
weather factors. We’ve had unseasonably cold temperatures that
may be affecting economic activity in this job market and
elsewhere.”

And in the Fed policy-makers’ statement accompanying their
decision to keep tapering last month, they attributed a “pause”
in growth to being “in large part because of weather-related
disruptions and other transitory factors.”

To be sure, bad weather in some of the country has played a
role, and to the extent it has, we’ll get some bounce-back in
some areas of the economy.

NOT BUYING IT

But the weather has not been bad everywhere, and Mark
Hanson, a California-based mortgage banking veteran who provides
real estate advisory services, doesn’t buy that it has been the
fundamental cause of poor data. After all, the West is having a
drought but dry weather is no impediment to buying a house or a
car.

“So funny that nobody ever talks about the best house and
car shopping weather in a generation west of the Rockies. They
look out their windows in NY and think it’s the same in LA,” he
said by email, noting widespread weakness in many of the
formerly hot western real estate markets.

“I maintain that the economic gains we should be enjoying
due to historically warm weather should offset the losses due to
the bad weather elsewhere.”

Now remember, the Fed is in something of a tight spot. For
it to pause the taper, or increase bond buys, is an expensive
and risky decision. Janet Yellen is new to the chair and must be
putting a premium on appearing serene and in control.

The risk is that the bad weather is exacerbating underlying
weakness which was already apparent. If softness in the economy
goes beyond weather the bounce-back we’d normally see in
consumption once spring comes won’t fully happen. By the time we
see that data, in May and June, the Fed will likely have carried
on tapering.

Here is the thing: the Fed toolbox is looking bare. Few are
enthusiastic about the risks of QE, there is no room to cut
rates, and forward guidance is, in essence, just talk.

That, in combination with uncertainty about the weather,
gives the Fed a lot of reasons to err on the side of delaying
any change of course.

If this is about more than a bad winter, that will prove to
have been an extremely expensive error.

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