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Tim Duy
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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 7 days ago 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
Sorry for the light blogging this week - just getting back into the swings of things during the first week of spring term. But nothing like an employment report to pull me out of hibernation. It is no secret that the employment report has a significant impact on monetary policy. And we need to make increasingly deeper dives at the data to discern the implications for policy. Federal Reserve Chair Janet Yellen made that clear in her speech this week when she outlined a number of indicators - part-time but want full-time, wages,long-term unemployment, and labor force participation - as... Continue reading
Posted Apr 3, 2014 at Tim Duy's Fed Watch
Earlier today I said: Fourth, the dots undeniably moved forward and steeper, which means individual outlooks on the definitions of "considerable period" or "accommodative" did in fact change in meaningful ways. I am surprised, however, that this was not anticipated by market participants given the rapid decline in the unemployment rate. Along any given Fed objective function, one would expect that a more rapid decrease in unemployment would move forward and steepen the interest rate trajectory, even if just by 25 or 50pb. The Washington Post's Ylan Mui had a sitdown with Federal Reserve President John WIlliams: Logically, given that... Continue reading
Posted Mar 24, 2014 at Tim Duy's Fed Watch
Both. I see the source of your confusion. The "aggressive action" above was referred to the hypothesis that financial stability concerns caused them to exit asset purchases, not rewrite the Evans rule, and signal rate hikes. Prevents them from taking more "aggressive action" from a dovish side. And it could induce them to hike rates sooner. Which is more aggressive from a "hawkish side." So I see the confusion.
Toggle Commented Mar 24, 2014 on Kocherlakota's Dissent at Tim Duy's Fed Watch
1 reply
Some thoughts on post-FOMC activity as we head into Monday. First, I did not cover Federal Reserve Chair Janet Yellen's definition of a "considerable period" as six months in my review of the FOMC statement. I did not highlight the issue because when I went back to the tape, it looked clear to me that the bulk of the bond market response came at the release of the statement and projections. To be sure, the equity market stumbled, but here I completely agree with Felix Salmon: But here’s the thing: the market didn’t freak out....last Thursday, for instance, the yield... Continue reading
Posted Mar 23, 2014 at Tim Duy's Fed Watch
Minneapolis Federal Reserve President Narayana Kocherlakota defended his dissent at the March FOMC meeting. I thought it was quite remarkable. The reason of the dissent itself is not particularly unexpected: I dissented from the new guidance for two reasons. The first reason is that the new guidance weakens the credibility of the Committee’s commitment to target 2 percent inflation. The second reason is that the new guidance fosters policy uncertainty and thereby suppresses economic activity. I have already discussed the implications of dropping the Evans rule in regards to inflation. It implies an intention to approach the inflation target from... Continue reading
Posted Mar 21, 2014 at Tim Duy's Fed Watch
The outcome of the FOMC meeting was pretty much as I anticipated. Asset purchases were cut by $10 billion. The Evans rule was dumped. And forward guidance was enhanced to emphasize that rates would be low for a long, long time. All seems pretty much in-line with the general consensus. Yet financial market participants took a hawkish view of the news. Bonds were trounced - the 5 year Treasury yield lept almost 15bp. Market participants clearly saw something they didn't like. This despite what was a reasonably dovish inaugural press conference by Federal Reserve Chair Janet Yellen. Indeed, she strongly... Continue reading
Posted Mar 19, 2014 at Tim Duy's Fed Watch
I was re-reading some of the recent overshooting debate and it occurred to me that it is comical that we are even having this discussion. The Fed is not going to deliberately overshoot inflation, period. That train left the station long ago. So long ago that you can't even here the rumble on the tracks. The train left the station on January 25, 2012, with this statement by the Federal Reserve: The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over... Continue reading
Posted Mar 18, 2014 at Tim Duy's Fed Watch
The FOMC meeting begins today and ends tomorrow, followed by the traditional statement and Chair Janet Yellen's first press conference. The Fed will also update its forecasts - important because ultimately the forecast drives the policy decisions. I don't anticipate large changes to the growth or inflation forecasts. We should see modest downward revisions to the unemployment rate forecast. What will be more interesting is the impact those changes will have on the interest rate forecast. The bulk of the FOMC expects the first rate hike will be in the range of mid- to late-2015, with a handful earlier or... Continue reading
Posted Mar 18, 2014 at Tim Duy's Fed Watch
The issue of the degree of labor market slack in the US economy is now a hot topic. Joe Weisenthal and Matthew Bosler at Business insider have been pushing the debate forward, see here and here, for example. This is an important concern for monetary policy as the general consensus on the Fed is sufficient slack will continue to justify an extended period of low interest rates. Hence, rate hikes can be delayed until mid- to late-2015, or even 2016 as suggested by Chicago Federal Reserve President Charles Evans. There exists, however, considerable uncertainty about the amount of slack in... Continue reading
Posted Mar 11, 2014 at Tim Duy's Fed Watch
The employment report for February modestly beat expectations with a nonfarm payroll gain of 175k, leaving the recent trends pretty much intact: Did the labor market shake off the impact of a cold and snowy winter? No. Aggregate hours worked turned over during the winter, sending the year-over-year gains southward as well: Looks like the weather was less about hiring, and more about people not being able to get to their jobs. The unemployment rate edged up: I suspect we are seeing something like we saw in late 2011 when the unemployment rate fell sharply and then moved sideways for... Continue reading
Posted Mar 7, 2014 at Tim Duy's Fed Watch