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Tim Duy
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The lackluster August employment report clearly defied expectations (including my own) for a strong number to round out the generally positive pattern of recent data. That said, one number does not make a trend, and the monthly change in nonfarm payrolls is notoriously volatile. The underlying pattern of improvement remains in tact, and thus the employment report did not alleviate the need to adjust the Fed's forward guidance, allow there is a less pressing need to do so at the next meeting. In any event, the days of the "considerable time" language are numbered. Nonfarm payrolls gained just 142k in... Continue reading
Posted Sep 8, 2014 at Tim Duy's Fed Watch
Tomorrow morning we will be obsessing over the details of the August employment report with an eye toward the implications for monetary policy. Time for a quick review of some key indicators. First, initial unemployment claims continue to track at pre-recession levels: The employment components of both ISM reports where solid: The ADP report, however, was arguably lackluster with a gain of just 204k private sector jobs: The consensus forecast is for nonfarm payroll growth of 230k with a range of 195k to 279k. I am in general agreement with that forecast: I am somewhat concerned that I should be... Continue reading
Posted Sep 4, 2014 at Tim Duy's Fed Watch
The ISM manufacturing report came in ahead of expectations with the strongest number since 2011: Moreover, strength was evident throughout the internal components: Note too that the report is consistent with other manufacturing numbers: If this is a taste of the data to expect this fall, it is tough to see how the Fed will be able to maintain their "considerable period" language much longer. Continue reading
Posted Sep 2, 2014 at Tim Duy's Fed Watch
With the leaves turning to gold signaling the end of summer, so too will the Fed be facing its own change of seasons as quantitative easing comes to an end. With asset purchases likely ending in October, time is growing short for the Fed to communicate a plan for the normalization of policy. To be sure, the outline of the plan is already in place, with interest on reserves playing a primary role backed by overnight repurchase operations. The timing of any action to raise rates, however, is likely to become a more contentious issue during the fall. Hawks will... Continue reading
Posted Sep 1, 2014 at Tim Duy's Fed Watch
The Kansas City Federal Reserve's annual Jackson Hole conference is next week, and all eyes are looking for signs that Fed Chair Janet Yellen will continue to chart a dovish path for monetary policy well into next year. Indeed, the conference title itself - "Re-Evaluating Labor Market Dynamics" - points in that direction, as it emphasizes a topic that is near and dear to Yellen's heart. My expectation is that no hawkish surprises emerge next week. Despite continued improvement in labor markets, Yellen will push the Fed to hold back on aggressively tightening monetary policy. And with inflation still below... Continue reading
Posted Aug 12, 2014 at Tim Duy's Fed Watch
How much leeway does Fed Chair Janet Yellen have in her campaign to hold interest rates low for a considerable period after asset purchases end later this year? If you listen to Fed hawks, you would believe that she is quickly running out of room. Dallas Federal Reserve President Richard Fisher argued that the liftoff date for interest rates is creeping forward. From Reuters: "I think the committee, as I listen to them and I can only speak for myself around that table during two days of discussion, is coming in my direction, so I didn’t feel the need to... Continue reading
Posted Aug 6, 2014 at Tim Duy's Fed Watch
This is just plain depressing. The front page stories from the CityRegion section from my morning paper: Man sentence for kidnap, assault A Eugene man was sentenced Thursday to more than 22 years in prison for terrorizing, drugging, stabbing and shooting his new girlfriend in April... Online sex ad sting leads to 6 arrests Six men were arrested Wednesday night and early Thursday morning on prostitution charges after Eugene police and the Lane County District Attorney’s office coordinated a sting to arrest online sexual predators... Brother plead not guilty to encouraging child sexual abuse Twin brothers Jody and Jacky Allard... Continue reading
Posted Aug 1, 2014 at Tim Duy's Fed Watch
The overall tenor of the July employment report was consistent with the song that Yellen and Co. are singing. Labor markets are generally improving at a moderate pace, yet despite relatively low unemployment, there is plenty of reason to believe considerable slack remains in the economy. The headline nonfarm payroll number was a ho-hum gain of 209K with some small upward revisions for the previous two months. Steady above 200k gains this year are lifting the 12-month moving average of jobs higher: In the context of the range of indicators that Fed Chair Janet Yellen has drawn specific attention to:... Continue reading
Posted Aug 1, 2014 at Tim Duy's Fed Watch
The employment cost index is bearing the blame for today's market sell-off. Sam Ro at Business Insider reports: ...traders agree that today's sell-off is probably due to one stat: the 0.7% jump in the employment cost index (ECI) in the second quarter. This number, which crossed at 8:30 a.m. ET, was a bit higher than the 0.5% expected by economists. And it represents a year-over-year growth rate of over 2%. It's a big deal, because it's both a sign of inflation and labor market tightness, two forces that put pressure on the Federal Reserve to tighten monetary policy sooner than... Continue reading
Posted Jul 31, 2014 at Tim Duy's Fed Watch
At the conclusion of this week's FOMC meeting, policymakers released yet another statement that only a FedWatcher could love. It is definitely an exercise in reading between the lines. The Fed cut another $10 billion from the asset purchase program, as expected. The statement acknowledged that unemployment is no longer elevated and inflation has stabilized. But it is hard to see this as anything more that describing an evolution of activity that is fundamentally consistent with their existing outlook. Continue to expect the first rate hike around the middle of next year; my expectation leans toward the second quarter over... Continue reading
Posted Jul 30, 2014 at Tim Duy's Fed Watch
Fed Reserve Chair Janet Yellen testified before the Senate today, presenting remarks generally perceived as consistent with current expectations for a long period of fairly low interest rates. Binyamin Applebaum of the New York Times notes: Ms. Yellen’s testimony is likely to reinforce a sense of complacency among investors who regard the Fed as convinced of its forecast and committed to its policy course. She reiterated the Fed’s view that the economy will continue to grow at a moderate pace, and that the Fed is in no hurry to start increasing short-term interest rates. A key reason that Yellen is... Continue reading
Posted Jul 15, 2014 at Tim Duy's Fed Watch
The Federal Reserve released the minutes of the June FOMC meeting today, but the contents had little in the way of groundbreaking news. Most interesting was that Fed officials tired of being pestered about the "October or December" question regarding the end of the QE and decided to more or less commit to the earlier date: Some committee members had been asked by members of the public whether, if tapering in the pace of purchases continues as expected, the final reduction would come in a single $15 billion per month reduction or in a $10 billion reduction followed by a... Continue reading
Posted Jul 9, 2014 at Tim Duy's Fed Watch
Via Twitter, modest proposal summarizes my last post: Shorter @TimDuy, short the front end not the 10 year because the Fed will tighten before inflation is a problem — modest proposal (@modestproposal1) July 7, 2014 This made me think about the last tightening cycle. For those that hope to use tighter monetary policy to bolster the case against equities, recall that patience may be required: For those making the bear case against long bonds, recall that initially long rates fell, and over the entire cycle rose just (roughly) 50bp: The short end of the curve suffered, and the yield... Continue reading
Posted Jul 8, 2014 at Tim Duy's Fed Watch
I am in general agreement with Calculated Risk on this point: I also think the economy is picking up, and I agree that as slack diminishes, we will probably see real wage growth and an uptick in inflation. Moreover, note that this is largely consistent with the Federal Reserve's outlook as well. Recall St. Louis Federal Reserve President John Williams from April, via Bloomberg: Williams, who forecast the Fed will start raising interest rates in the second half of next year, said inflation has “bottomed out” and will gradually accelerate to the central bank’s 2 percent target. He said prices... Continue reading
Posted Jul 6, 2014 at Tim Duy's Fed Watch
The BLS reported solid numbers for the labor market in June, although there may be somewhat less acceleration than meets the eye. On net, the ongoing rapid fall in the unemployment rate nudges forward my expectation of when the Fed makes history and begins to lift rates from the zero bound. Still, there does not appear to be sufficient reason yet to believe the Fed will steepen the pace of increases. Nonfarm payrolls rose by 288k, ahead of expectations for 211k. Job growth was broad-based and earlier months were revised higher. The three-month average for job growth is at its... Continue reading
Posted Jul 3, 2014 at Tim Duy's Fed Watch
It appears that a case of inflation hysteria is gripping Wall Street. Joe Weisenthal at Business Insider sums up the current state of play: Here's what's on Wall Street's mind right now: Inflation is finally happening, and the Fed will end up being behind the curve. ...there were two big moments this week. 1) There was the jump in Core CPI that was the biggest since 2009. 2) And then there was the Janet Yellen press conference, in which she said that the CPI jump could be just "noise" and that the recent drop in the unemployment rate was not... Continue reading
Posted Jun 22, 2014 at Tim Duy's Fed Watch
Yesterday I wrote a fairly conventional analysis of the outcome of the FOMC meeting and the subsequent press conference by Federal Reserve Chair Janet Yellen. I think that analysis is consistent with that of the median policymaker on Constitution Avenue: As long as the economy continues to grind upward at a moderate pace and inflation pressures remain constrained, the expected path of short term interest rates is one of a slow rise with the first hike somewhere around a year away. That view is, of course, data dependent, and given the current readings on inflation and unemployment, combined with a... Continue reading
Posted Jun 19, 2014 at Tim Duy's Fed Watch
The FOMC delivered as expected today, with virtually no change to policy. The tapering continues with another $10 billion cut to the pace of asset purchases, which was essentially the only change to the FOMC statement aside from the description of the economy. The Wall Street Journal tracks the changes here. The Fed downgraded their GDP forecast, as expected given the weak Q1 numbers. They did not include any upward offsets in subsequent years. Consequently, the expected trajectory of output falls further short of current estimates of potential: Expect estimates of potential output to come down even further. In contrast,... Continue reading
Posted Jun 18, 2014 at Tim Duy's Fed Watch
The FOMC is set this week to cut another $10 billion from its asset purchase program. The statement itself will most likely point toward additional confidence that the first quarter slowdown was an aberration, and may even point to signs that inflation has bottomed and is headed higher. Both will give the Federal Reserve more confidence in their existing forecasts. The forecasts will likely be very similar to those issued in January, albeit with some modifications. The output forecast may be adjusted to account for Q1 weakness, while the unemployment forecast is likely to be edged down once again. The... Continue reading
Posted Jun 15, 2014 at Tim Duy's Fed Watch
Why did the Federal Reserve lean against their optimistic 2014 forecast? It seems that monetary policy over the past year can be summarized as a missed opportunity to supercharge the recovery, thereby locking the US economy into a suboptimal growth path. Last week's speech by New York Federal Reserve President William Dudley noted the reasons monetary policymakers expected the economy to improve this year: Since the downturn ended in mid-2009, real GDP growth has averaged only 2.2 percent per year despite a very accommodative monetary policy. This performance reflects three major factors—the significant headwinds resulting from the bursting of the... Continue reading
Posted May 27, 2014 at Tim Duy's Fed Watch
Today New York Federal Reserve President William Dudley gave what was both an interesting and depressing speech. Interesting in that he provides some new thoughts on the exit strategy. Depressing in that he outlines a case for persistently low interest rates. One wonders why, given such an outlook, the Fed is so firmly focused on the exit strategy to begin with, rather than accelerating the pace of the recovery. Dudley tries to sound an optimistic note regarding the outlook, including dismissing the first quarter GDP report, but his optimism is tempered, very tempered: With the fundamentals of the economy improving... Continue reading
Posted May 20, 2014 at Tim Duy's Fed Watch
The headlines numbers from the April employment report are at first blush a challenge to the Fed's low rate commitment. One doesn't have to dig much deeper into the data, however, to see that the near term implications are minimal as the Fed maintains its strong focus on measures of labor market slack. Still, the rapid drop in unemployment - if it continues - will leave policymakers increasingly anxious that their one-way bet on labor market slack will quickly turn sour. Nonfarm payrolls grew pay 288k, well above expectations of 215k. While this numbers pushes the three-month moving average higher,... Continue reading
Posted May 4, 2014 at Tim Duy's Fed Watch
The FOMC will wrap up a two-day meeting this Wednesday. I suspect the subsequent statement will be met with little fanfare. There simply has been little in the way of data to prompt any new policy path. Steady as she goes. To be sure, the Fed will be greeted by the Q1 GDP report Wednesday morning, and it is widely expected to be very weak. But incoming data (retail sales, auto sales, industrial production, and employment, for example) suggests that much of this weakness was weather related while the underlying pace of activity, albeit arguably unexciting, remains unchanged. In short,... Continue reading
Posted Apr 27, 2014 at Tim Duy's Fed Watch
The March FOMC minutes were generally interpretted as having a dovish tenor, contrasting with the generally hawkish reception for the statement and ensuing press conference. Overall, the Fed appears committed to a long period of low interest rates and I continue to think this should be the baseline view. But actually policy seems to remain hawkish relative to the Fed's rhetoric. By its own admission, the Fed is missing badly on both its mandates. Why then the push to reduce accommodation by ending asset purchases and laying the groundwork for the first rate hike? This leaves me wary the Fed... Continue reading
Posted Apr 10, 2014 at Tim Duy's Fed Watch
The March employment report came in pretty much in line with expectations. Nonfarm payrolls gained by 192k, and January and February were both revised higher. If you can discern any meaningful change in the underlying pace of economic activity from the nonfarm payrolls numbers, you have sharper eyes than me: You could almost draw that twelve month trend with a ruler. The unemployment rate moved sideways: In the past, sharp declines in the unemployment rate have been followed by periods of relative stability. I suspect we are currently in one such period. The internals of the household report were generally... Continue reading
Posted Apr 4, 2014 at Tim Duy's Fed Watch