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Tim Duy
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Let’s revisit this from San Francisco Federal Reserve Resident John Williams: If you look until 2015 or so, the inflation data basically followed our models, emphasizing the role of weakness in the economy. Where this mystery has happened is really in the last year or two. I view both inflation picking up faster than expected in early 2017 and now the pullback as just part of the variability that’s going to happen. I don’t see any signs that somehow the inflation process is fundamentally changed. I’ve been doing this a long time, and the Phillips curve has been declared dead... Continue reading
Posted yesterday at Tim Duy's Fed Watch
If we ignore inflation, then nothing is really standing in the way of a rate hike in December. Of course, given that arguably the primary job of a central bank is to meet its definition of price stability, the Fed shouldn’t really ignore inflation. Policymakers, however, would counter that they are not ignoring inflation. They are simply favoring the inflation forecast over actual inflation. And they would further argue they have good cause – with the economy chugging along, it is only a matter of time before resource constraints become evident and price pressures rise. That’s their story, and they... Continue reading
Posted 5 days ago at Tim Duy's Fed Watch
The Federal Reserve remains committed to a December rate hike, persistent low inflation not withstanding. With unemployment below Fed estimates of its longer-run natural rate, most FOMC participants do not need evidence of stronger inflation to justify further rate hikes. Ongoing solid job growth will be sufficient cause for tighter policy, especially in what they perceive to be an environment of loosening financial conditions. The main risk from this scenario is that the US economy enters the next recession with diminished inflation expectations, which could further hobble central bankers already facing the prospect of returning to the effective lower bound... Continue reading
Posted Oct 15, 2017 at Tim Duy's Fed Watch
Newly minted Nobel laureate Richard Thayler weighed in on equities today. Via Bloomberg: A buoyant and complacent stock market is worrying Richard H. Thaler, the University of Chicago professor who this week won the Nobel Prize in economics. “We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping,” Thaler said, speaking by phone on Bloomberg TV. “I admit to not understanding it.”... ...“I don’t know about you, but I’m nervous, and it seems like when investors are nervous, they’re prone to being spooked,” Thaler said, “Nothing seems to spook... Continue reading
Posted Oct 10, 2017 at Tim Duy's Fed Watch
Scott Sumner is perplexed by Fed chair candidate Kevin Warsh. He reads the 2010 FOMC transcripts and finds Warsh explaining: First, my views on policy. As I said when we met by videoconference, my views are increasingly out of step with the views of most people around this table. The path that you’re leading us to, Mr. Chairman, is not my preferred path forward. I think we are removing much of the burden from those that could actually help reach these objectives, particular the growth and employment objectives, and we are putting that onus strangely on ourselves rather than letting... Continue reading
Posted Oct 10, 2017 at Tim Duy's Fed Watch
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The headline figure on nonfarm payrolls report came in well below already withered expectations, but the disappointment was more than compensated for in the details of both the establishment and household survey. The Fed is looking for data that allows them to overlook the weak inflation data. This was just that sort of data Continued as a PDF newsletter here or blog below... Nonfarm payrolls sank by 33k, and prior months were revised down. The three-month average is just 91k, which would put the job growth in-line with the range Fed officials believe is consistent with a steady unemployment rate.... Continue reading
Posted Oct 8, 2017 at Tim Duy's Fed Watch
The employment report for September will be released this morning. It is widely expected to disappoint as it comes in the wake of a tough hurricane season. But those weak numbers are not expected to dissuade the Fed from hiking in December. And unexpectedly strong numbers would only help prod along those officials getting cold feet from the weak inflation data. Continued here... Continue reading
Posted Oct 5, 2017 at Tim Duy's Fed Watch
The ISM manufacturing report for September came in stronger than expected. To be sure, hurricane impacts accounted for some of the boost, particularly in supplier deliveries and prices; anecdotal responses made this clear. But it isn’t all hurricanes. Manufacturing has been gaining steam since last year. The sector continues to throw off the 2015/2016 weakness associated with the oil price decline and rise in the dollar. I often feel this improvement has been overlooked. Continued here…. Continue reading
Posted Oct 3, 2017 at Tim Duy's Fed Watch
Big data week ahead that ends with the employment report for September. Considering the ongoing inflation weakness, one would think the Fed would be looking for a series of very strong job reports to justify a rate hike in December. But with Fed officials largely convinced that the soft inflation numbers are transitory, a middling jobs report would likely be sufficient to keep them on track, and even a weak report if they can attribute disappointing data to the busy hurricane season. Continued here... Continue reading
Posted Oct 1, 2017 at Tim Duy's Fed Watch
Federal Reserve Chair Janet Yellen made clear two things this week. First, that her and her colleagues are somewhat confounded by the inflation data. And second, that confusion does not yet deter them from their plan for gradual rate hikes. December is still on. Continued in newsletter form here... Continue reading
Posted Sep 27, 2017 at Tim Duy's Fed Watch
The battle over that final rate hike of 2017 continues as some policymakers find it increasingly difficult to ignore weak inflation numbers in recent months. Such concerns, however, do not appear likely to take center stage in December. Indeed, the Fed looks fairly committed to a rate hike at that meeting. But the consensus on that meeting and beyond is being held together by forecasts of a rebound of inflation next year. It will be hard to maintain that consensus if inflation numbers don’t soon give more hope to those forecasts. Continued here in new, experimental newsletter format... Continue reading
Posted Sep 25, 2017 at Tim Duy's Fed Watch
The immediate policy outcomes of the FOMC meeting were largely as expected. Central bankers left interest rates unchanged while announcing that the reduction of the balance sheet will begin in October as earlier outlined in June. The real action was in the Summary of Economic Projections. Policymakers continue to anticipate one more rate hike this year and three next. This policy stance looks inconsistent with the downward revisions to projections of inflation and the neutral rate; under the Fed’s earlier reaction function, the combination of the two would drive down rate projections. Arguably, policy is thus no longer as data... Continue reading
Posted Sep 24, 2017 at Tim Duy's Fed Watch
The Federal Reserve meeting this week will likely end with unchanged policy rates and the initiation of balance-sheet normalization. Market participants widely expect these outcomes, so they will come as no surprise. The real action in this meeting will come from the Fed’s description of the economy, the quarterly economic projections and Chair Janet Yellen’s press conference. The totality of the commentary should lean dovish as the Fed expresses concerns about the inflation outlook. The surprise would be a Fed that still leans more heavily toward the hawkish side of policy spectrum. Continued at Bloomberg Prophets.... Continue reading
Posted Sep 19, 2017 at Tim Duy's Fed Watch
Despite a low unemployment rate, inflation slowed this year, confounding central bankers who set in motion a tightening cycle on the expectation of firming prices. This leaves the Federal Reserve stuck in a quandary. Either transitory factors restrain inflation only temporarily, or perhaps expectations sink below the Fed’s 2 percent target. If the former, the central bank can continue along the current path of gradual rate hikes. The majority of monetary policy makers lean in this direction. But if the latter, sticking to the current plan risks excessive slowing and even recession. It is the type of policy mistake we... Continue reading
Posted Sep 15, 2017 at Tim Duy's Fed Watch
Federal Reserve hawks were on the march today, laying the groundwork for an additional rate hike this year despite weak inflation. First off, Cleveland Federal Reserve President Loretta Mester (voter next year), reiterated the "it's only temporary story" regarding inflation: In assessing where we are relative to the inflation goal, it’s always a good idea to look through temporary movements in the numbers, both those above and those below our goal, and focus on where inflation is going on a sustained basis. For example, when assessing the underlying trend in inflation, we should look through a temporary increase in gasoline... Continue reading
Posted Sep 7, 2017 at Tim Duy's Fed Watch
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The Federal Reserve is now destined to get a dramatic makeover in the next few months. That is assuming that the Trump administration carves some time out of their busy schedule of managing chaos to nominate more governors. And the Senate finds the time to confirm those nominations. Until the time the administration and Senate get their acts together, the balance of power at the Federal Reserve will shift to the regional presidents. And that could put monetary policy on a less certain course over the next year as doves on the FOMC are replaced with hawks and the Board... Continue reading
Posted Sep 6, 2017 at Tim Duy's Fed Watch
In the fall of 2015, Federal Reserve Governor Lael Brainard began building the intellectual framework to slow the pace of rate increases. Not soon enough to stop the rate hike of December that year, but the rest of the Fed soon fell in line, and the projected four rate hikes in 2016 became only one actual hike, a hike delayed until December of 2016. Can she shift the focus of the FOMC again? She made a valiant effort today. But will her colleagues get on board as they did last time? A key issue: he doesn't have the downtrend in... Continue reading
Posted Sep 5, 2017 at Tim Duy's Fed Watch
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The data flow is generally supportive of additional Fed action, surely enough to allow the Fed to move forward with balance sheet action later this month. But what about another rate hike? That remains an open question as low inflation remains an obstacle to further rate hikes for a sizable faction within the Fed. The employment report disappointed with job growth of 156k, shy of expectations for 180k. Previous months were revised downward. Looking through the monthly volatility, the report does little to change the basic story that job growth continues the slow downward trend that began in 2015: Mediocre,... Continue reading
Posted Sep 4, 2017 at Tim Duy's Fed Watch
The Federal Reserve Bank of Kansas City’s annual Jackson Hole conference offered little direct insight into the path of monetary policy for this year and next. But that doesn’t mean it was a nonevent. Perhaps the biggest takeaway is that the already small odds of Chair Janet Yellen being reappointed by the Trump administration when her term ends in February just got a lot slimmer. Continued at Bloomberg Prophets... Continue reading
Posted Aug 28, 2017 at Tim Duy's Fed Watch
The prevailing wisdom these days is that markets are behaving in inexplicable ways. I have a different view. If the market means U.S. equities, the behavior since the Federal Reserve began this tightening cycle has been very consistent with the behavior of past cycles. It's not sure all that complicated -- it’s about consistent economic growth -- and I am pretty sure fighting it is a losing bet. Continued at Bloomberg Prophets... Continue reading
Posted Aug 24, 2017 at Tim Duy's Fed Watch
Federal Reserve officials must think that something soon has to give in this economy. The current equilibrium, characterized by low inflation, low unemployment, low wage growth and high corporate profit margins, isn’t sustainable indefinitely, but they don’t know how or when it will crack. Continued at Bloomberg Prophets... Continue reading
Posted Aug 21, 2017 at Tim Duy's Fed Watch
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Some quick thoughts for the day. First, New York Federal Reserve President William Dudley gave an extended interview to the Associate Press. Definitely worth the time to read. Some highlights: 1.) Dudley never put a Trump bump in his forecast, so his forecast is essentially unchanged: I think we’re still on the same trajectory we’ve been on for several years. Above trend growth, gradually tightening labor market, inflation -- somewhat below our objective -- but we do expect as the labor market continues to tighten, to see firmer wage gains and that will ultimately filter into inflation moving up towards... Continue reading
Posted Aug 15, 2017 at Tim Duy's Fed Watch
The Federal Reserve has an opportunity to test a hypothesis critical to the health of the U.S. economy: Can persistently loose monetary policy boost the pace of productivity growth? Sadly, for now, an adherence to a strict Phillips curve framework for the economy and fear of financial instability will prevent the Fed from venturing down this path. Continued at Bloomberg Prophets... Continue reading
Posted Aug 15, 2017 at Tim Duy's Fed Watch
Vox has an article out this morning with the title "The real "deep state" sabotage is happening at the Fed." It begins: Trump administration officials are notorious for their suspicion that a “deep state” of career military, intelligence, diplomatic, or civil service professionals is seeking to sabotage their work. But for a clearer example of sabotage — albeit without much in the way of a conspiracy — Trump would do well to cast his gaze at the Federal Reserve, which, dating back to before his inauguration, has been waging war on an inflationary menace that appears not to exist. I... Continue reading
Posted Aug 14, 2017 at Tim Duy's Fed Watch
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Along with every decent employment report comes the efforts to debunk that report. I see that an article from Pedro Nicolaci Da Costa at Business Insider is making the rounds tonight. In it Da Costa directs us to this in particular from Komal Sri-Kumar: The plight of low-income workers is underlined by yet another statistic. According to BLS numbers, 7.6 million workers held multiple jobs last month, up 2% from 7.4 million in July 2016. The principal reason workers hold more than one position is that no single job provides a sufficient income. In a robust economic recovery, the number... Continue reading
Posted Aug 8, 2017 at Tim Duy's Fed Watch