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Tim Duy
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As is well known, second quarter GDP growth is not off to a strong start, at least according to the Atlanta Federal Reserve staff: If this forecast holds, then the first half of 2015 will be very weak if not flat, slow enough that commentators might be tempted to refer to growth as at "stall speed". But quarterly GDP numbers are fairly volatile. Would two consecutive weak quarters be terribly unexpected, or even suggestive of a troubling undercurrent in the economy? It is somewhat difficult to panic about the GDP numbers just yet, especially in the context of the continuous... Continue reading
Posted May 14, 2015 at Tim Duy's Fed Watch
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The Personal Income and Outlays report for March was released today. The pace of spending accelerated to 0.3% in real terms, the highest since last November and indication that the economy is perhaps shaking off some of its winter blues. On the other hand, inflation undershot the Fed's target for the 35th consecutive month, with core-inflation climbing just 1.3% over the past year. I would be a little wary that Fed officials won't find room for a somewhat more optimistic read on the data. Indeed, core-inflation on a monthly basis is also recovering from a winter stumble: The annualized monthly... Continue reading
Posted Apr 30, 2015 at Tim Duy's Fed Watch
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The FOMC concluded their meeting today, and the result left Fed watchers struggling to find something interesting to say. The really offered no insight into the economy with the opening paragraph: Information received since the Federal Open Market Committee met in March suggests that economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated, and the unemployment rate remained steady. A range of labor market indicators suggests that underutilization of labor resources was little changed. Growth in household spending declined; households' real incomes rose strongly, partly reflecting earlier declines in energy prices,... Continue reading
Posted Apr 29, 2015 at Tim Duy's Fed Watch
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The employment data hit an air pocket in March, in line with a variety of softer economic news in the first quarter. That said, it likely will have little near term impact on Fed policy; I anticipate they will tend to dismiss the number as expected volatility in the overall upward path of job growth. Job growth was paltry 126k in March and, in what might be a greater indication that US labor markets are hitting an inflection point, the January and February numbers were revised downward. The three-month moving average dipped sharply, while the 12-month moving average is leveling... Continue reading
Posted Apr 3, 2015 at Tim Duy's Fed Watch
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I came back from Spring Break vacation to find a detailed speech by Fed Chair Janet Yellen that further lays the groundwork for rate hikes to begin later this year. The speech is a remarkably clear elucidation of her views and provides plenty of insight into what we should be looking for as the Fed edges toward policy normalization. A speech like this once a month from a Federal Reserve Governor would, I think, go a long way toward enhancing the the Fed's communication strategy. One of the most important takeaways from this speech is the importance of labor market... Continue reading
Posted Mar 30, 2015 at Tim Duy's Fed Watch
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The FOMC concluded its two-day meeting today, and the results were largely as I had anticipated. The Fed took note of the recent data, downgrading the pace of activity from "solid" to "moderated." They continue to expect inflation weakness to be transitory. The risks to the outlook are balanced. And "patient" was dropped; April is still off the table for a rate hike, but data dependence rules from that point on. Growth, inflation and unemployment forecasts all came down. Especially important was the decrease in longer-run unemployment projections. The Fed's estimates of NAIRU are falling, something almost impossible to avoid... Continue reading
Posted Mar 18, 2015 at Tim Duy's Fed Watch
FOMC meeting with week, with a subsequent press conference with Fed Chair Janet Yellen. Remember to clear your calendar for this Wednesday. It is widely expected that the Fed will drop the word “patient” from its statement. Too many FOMC participants want the opportunity to debate a rate hike in June, and thus “patient” needs to go. The Fed will not want this to imply that a rate hike is guaranteed at the June meeting, so look for language emphasizing the data-dependent nature of future policy. This will also be stressed in the press conference. Of interest too will be... Continue reading
Posted Mar 15, 2015 at Tim Duy's Fed Watch
A quick one while I wait for my flight at National. Scott Sumner argues that the strong dollar will not impact US growth. In response to a Washington Post story, he writes: This is wrong, one should never reason from a price change. There are 4 primary reasons why the dollar might get stronger: 1. Tighter money in the US (falling NGDP growth expectations.) 2. Stronger economic growth in the US. 3. Weaker growth overseas. 4. Easier money overseas. In my view the major factor at work today is easier money overseas. For instance, the ECB has recently raised its... Continue reading
Posted Mar 12, 2015 at Tim Duy's Fed Watch
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The February employment report almost certainly means the Fed will no longer describe its policy intentions as "patient" at the conclusion of the March FOMC meeting. And it also keep a June rate hike in play. But for June to move from "in play" to "it's going to happen," I still feel the Fed needs a more on the inflation side. The key is the height of that inflation bar. The headline NFP gain was a better-than-expected 295k with 18k upward adjustment for January. The 12-month moving average continues to trend higher: Unemployment fell to 5.5%, which is the top... Continue reading
Posted Mar 6, 2015 at Tim Duy's Fed Watch
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The PCE inflation data was released today, and I have been seeing commentary on the relative strength of the core-inflation numbers. This, for example, from the Wall Street Journal: A key gauge of U.S. consumer prices sank in January due partly to cheaper oil, undershooting the Federal Reserve’s goal of 2% annual inflation for the 33rd consecutive month. But a gauge of underlying price pressures remained resilient headed into 2015. The picture: Core-PCE is hovering around 1.3%, and the stability relative to last month is supposedly supportive of Federal Reserve plans to hike interest rates later this year. I would... Continue reading
Posted Mar 2, 2015 at Tim Duy's Fed Watch
Almost too much Fed news last week to cover in one post. The highlight of the week was Federal Reserve Chair Janet Yellen's testimony to the Senate and House. On net, I think her assessment of the US economy was more optimistic relative to the last FOMC statement, which gives a preview of the outcome of the March 17-18 FOMC meeting. Labor markets are improving, output and production are growing at a solid pace, oil is likely to be a net positive, both upside and downside risks from the rest of the world, and, after the impact of oil prices... Continue reading
Posted Mar 1, 2015 at Tim Duy's Fed Watch
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All eyes will be focused on Federal Reserve Chair Janet Yellen as she presents the semi-annual monetary policy testimony to the Senate Banking Committee. I anticipate that she will stick to an economic outlook very similar to that detailed in the last FOMC statement and related minutes. Expect her to indicate that the Fed is closing in on the time of the first rate hike - after all, this was clearly the topic of conversation at the January FOMC meeting. I anticipate the "Audit the Fed" movement will be on display in the Q&A, which will provide Senators the opportunity... Continue reading
Posted Feb 22, 2015 at Tim Duy's Fed Watch
Minutes from the January FOMC meeting were released today. It is fairly clear that the Fed is gearing up for rates hikes: Participants discussed considerations related to the choice of the appropriate timing of the initial firming in monetary policy and pace of subsequent rate increases. Ahead of this discussion, the staff gave a presentation that outlined some of the key issues likely to be involved... The debate sounds familiar. On one side are those concerned that the Fed's zero rate policy will overstay its welcome: Several participants noted that a late departure could result in the stance of monetary... Continue reading
Posted Feb 18, 2015 at Tim Duy's Fed Watch
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Federal Reserve speakers were out and about today. First off, Richmond Federal Reserve President Jeffrey Lacker set a fairly high bar for NOT hiking in June. Via the Wall Street Journal: “At this point, raising rates in June looks like the attractive option for me,” Mr. Lacker told reporters following a speech Tuesday in Raleigh, N.C. “Data between now and then may change my mind, but it would have to be surprising data.”... ...“The economy’s clearly growing at a more rapid, sustained pace than it was a year ago,” he said. “Economies that are growing faster need higher real interest... Continue reading
Posted Feb 10, 2015 at Tim Duy's Fed Watch
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Financial market participants do not believe the Fed will pursue their expected policy path: David Wessel opines on the reasons from his post at Brookings: First, financial markets are not interested in the median Fed official; they’re interested in Chairwoman Janet Yellen, and they assume her dot is lower than the median...Second, the markets think Fed officials and staff economists are overly optimistic about the U.S. economy, as they have been in the past...Third, there’s the inflation issue. Many do not believe that the Fed will raise rates until underlying inflation is a lot closer to its 2% target.... I... Continue reading
Posted Feb 9, 2015 at Tim Duy's Fed Watch
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The January jobs report came in above expectations, with nonfarm payrolls growing by 257k and, more importantly, there were large upward revisions to the previous two months. Simply put rumors of the demise of the US economy continue to be premature. The pace of job gains accelerated further on average: Oil and gas extraction jobs declined by 1.9k, but we all know more are coming. But outside of that sector, the economy added 255k jobs. The oil and gas extraction sector itself is only 200k jobs. In short, the fears that this sector is going to topple the US economy... Continue reading
Posted Feb 6, 2015 at Tim Duy's Fed Watch
Some quick notes on monetary policy this afternoon: 1.) Another policymaker in favor of a first half rate hike. Cleveland Federal Reserve President Loretta Mester supports a rate hike by June. Via Michael Derby at the Wall Street Journal: Expressing confidence weak inflation will eventually rise again, Federal Reserve Bank of Cleveland President Loretta Mester said Wednesday the U.S. central bank remains on track for raising rates in the next few months. Noting that Fed policy isn’t on a “pre-set path,” Ms. Mester said “if incoming economic information supports my forecast, I would be comfortable with liftoff in the first... Continue reading
Posted Feb 5, 2015 at Tim Duy's Fed Watch
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The ritual of employment week is upon us once again, that glorious time of the month when we all imagine that we possess the intellectual and spiritual capacity to devine deep meaning from a highly volatile and heavily revised number. Unable to resist the pull myself, I look forward to a fairly steady reading on the labor market that will do little to sway monetary policy in either direction. The real action is in the wage data, but even there we may find little of interest, as any gain might do little more than reverse the surprise decline of the... Continue reading
Posted Feb 4, 2015 at Tim Duy's Fed Watch
It is always interesting to see how others perceive you. For instance, I wasn't sure what to make of this from Paul Krugman: The monetary-policy gap between insiders and outsiders — between economists at the Fed and other policy institutions, who still seem eager to raise rates, and those of us on the outside, who think this is a really, really bad idea — continues to widen. This morning Tim Duy — one of the outsiders who, commenting from his perch at Mark Thoma’s invaluable blog, has seemed most sympathetic to the urge to hike rates — joins the what-are-they-thinking... Continue reading
Posted Feb 3, 2015 at Tim Duy's Fed Watch
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Not only is core-PCE inflation on a year-over-year basis trending away from the Fed's target: but the deceleration in recent months is truly shocking: It is hard to see how the Fed can be confident that inflation with trend back to target when looking at these numbers. They need some acceleration in wage growth to justify their intentions to begin normalizing policy, and even with such acceleration, I think their case is fairly weak in the context of the current inflation environment. If they make a case, they will base it on these three pillars: 1.) With unemployment nearing 5%,... Continue reading
Posted Feb 2, 2015 at Tim Duy's Fed Watch
Early salvos by Federal Reserve policymakers in the wake of last week's FOMC non-event suggest that recent developments have had little impact on Fed thinking with regards to the appropriate timing of rate hikes. The middle of this year remains the internal forecast. Whether data or events cooperate is of course another question. I think it is worth viewing Friday's two interviews with St. Louis Federal Reserve President James Bullard at Bloomberg and San Francisco Federal Reserve President John Williams at CNBC. Bullard is fairly clear in his view that financial markets are doing it wrong: “The market has a... Continue reading
Posted Feb 1, 2015 at Tim Duy's Fed Watch
If you were looking for fireworks from today's FOMC statement, you were disappointed. Indeed, you need to work pretty hard to pull a story out of this statement. It provided little reason to believe that the Fed has shifted its view since December. A June rate hike remains the base case. The Fed's assessment of the current statement is arguably the best in years: Information received since the Federal Open Market Committee met in December suggests that economic activity has been expanding at a solid pace. Labor market conditions have improved further, with strong job gains and a lower unemployment... Continue reading
Posted Jan 28, 2015 at Tim Duy's Fed Watch
The FOMC will reveal the outcome of this week's meeting later today. I think Calculated Risk hits the high points - "patient" is in, "considerable time" is completely out. Beyond this, we will be looking for clues on how the Fed is interpreting the current economic environment. I suspect little change in the overall tenor of the statement as they will want to leave June open as an option. I reiterate my position: The Fed needs to see an acceleration in wage growth to be confident that inflation will return to trend if they intend to raise rates in June.... Continue reading
Posted Jan 27, 2015 at Tim Duy's Fed Watch
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Increasingly, the Federal Reserve stands in stark contrast with its global counterparts. While the ECB readys its own foray into quantitative easing, the Bank of England shifted to a more dovish internal position, the central bank of Denmark joined the Swiss in cutting rates, and the Bank of Canada unexpectedly cut rates 25bp this morning. The latter move I found somewhat unsurprising given the likely impact of oil prices on the Canadian economy. The rest of the world is diverging from US monetary policy. How long can the Fed continue to stand against this tide? Late last week, Reuters reported... Continue reading
Posted Jan 21, 2015 at Tim Duy's Fed Watch
I see Jon Hilsenrath at the Wall Street Journal seconds my take from this morning: Federal Reserve officials are on track to start raising short-term interest rates later this year, even though long-term rates are going in the other direction amid new investor worries about weak global growth, falling oil prices and slowing consumer price inflation. This is generally consistent with my view. The Fed is likely reacting more slowly than market participants. Hilsenrath adds something I forgot to mention: Central to their internal deliberations ahead of the March meeting is a debate about how low the jobless rate can... Continue reading
Posted Jan 19, 2015 at Tim Duy's Fed Watch