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Tim Duy
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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 3 days ago 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 4 days ago 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
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As it stands now, we are heading into the next FOMC meeting with the growing expectation that the Fed will take a dovish turn. Is it not obvious that global economic turmoil, collapsing oil prices, weak inflation, and a stronger dollar are clearly pointing to rapidly rising downside risks to the US economy? For financial market participants, they answer is a clear "yes." Expectations of the first rate hike have been pushed out to the end of this year, seemingly in complete defiance of Fed plans for policy normalization. The Fed may get there as well and abandon their carefully... Continue reading
Posted Jan 18, 2015 at Tim Duy's Fed Watch
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The December employment report, with its surprising combination of solid job gains and decelerating wage growth, leaves Fed policy up the air. Headline nonfarm payrolls gained by 252k, while previous months were revised up a net 50k. Job growth continues to accelerate: Note the acceleration in aggregate hours worked: Such gains suggest the recent acceleration in GDP growth is real and likely to be sustained. From the household survey, we see that the unemployment rate continues to decline. Fed forecasts will once again soon be in jeopardy: In the context of indicators previously identified by Federal Reserve Chair Janet Yellen:... Continue reading
Posted Jan 9, 2015 at Tim Duy's Fed Watch
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At the moment, there are many different competing threads in the tapestry of monetary policy, with another thread entering the pattern with tomorrow's employment report. In short, the Fed is balancing clear evidence of accelerating US activity in the back half of 2014 against the implications of declining oil prices and a host of international weaknesses that are roiling financial markets. The reality of volatility in asset prices was on full display this week. The Fed desire to begin normalizing policy with a rate hike in the middle of this year certainly appears in jeopardy. They very much need continued... Continue reading
Posted Jan 8, 2015 at Tim Duy's Fed Watch
Is this our future, brought back from the past? A contact referenced the last hike cycle via the FOMC statements from 2003-04 (emphasis added): October 28, 2003: The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future. In these circumstances, the Committee... Continue reading
Posted Dec 22, 2014 at Tim Duy's Fed Watch
Last week I had six questions for Federal Reserve Chair Janet Yellen. Here is my attempt to piece together the answers from her post-FOMC press conference: Question 1: If you want to know what the Fed is thinking at this point, a journalist needs to push Yellen on the secular stagnation issue at next week's press conference. Does she or the committee agree with Fischer? And does she see any inconsistency with the SEP implied equilibrium Federal Funds rates and the current level of long bonds? Yellen, in answer to Peter Coke of Bloomberg Television: "(The Committee) are optimistic that... Continue reading
Posted Dec 21, 2014 at Tim Duy's Fed Watch
Running short on time today.... Today's FOMC statement was a reminder that in normal times the Federal Reserve moves slowly and methodically. Policymakers were apparently concerned that removal of "considerable time" by itself would prove to be disruptive. Instead, they opted to both remove it and retain it: Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds... Continue reading
Posted Dec 17, 2014 at Tim Duy's Fed Watch
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The string of solid US economic news continued with industrial production advancing 1.3% in November. Year-over-year growth (5.2%) is now comparable to the late-90's: Meanwhile, the international fallout from the oil price drop continues. Russia is a classic emerging market crisis story. The decline in energy prices reveals a currency mismatch between assets and liabilities. The decline in oil dries up the dollars needed to support those liabilities, so the value of the ruble is bid down as market participants scramble for dollars. One suspects that capital flight from Russia only aggravates the problem; those oligarchs are seeing their fortunes... Continue reading
Posted Dec 15, 2014 at Tim Duy's Fed Watch
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FOMC meeting this week. We all pretty much know the lay of the land. "Considerable time" is on the table, and whether it stays or goes is a close call. The existence of the press conference this week argues for the change over just waiting until January. Stupid reason, I know, but we are just playing the Fed's game here. No real reason not to wait until January other than to keep a March rate hike in play, but only a few policymakers are seriously looking at March anyway. Uncertainty regarding the financial market impact of the oil price drop... Continue reading
Posted Dec 14, 2014 at Tim Duy's Fed Watch
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Incoming data in the second half of this week continues to support the Federal Reserve's plans to begin normalizing policy in the middle of next year, with the removal of "considerable time" language next week a likely first step. Retail sales for November were unquestionably strong and reveal an acceleration in the pace of core sales: You were right if you dimssed the early earnings on the holiday shopping season as useless noise. Similarly, consumer confidence is pushing to pre-recession levels: And note this from Reuters: "Expected wage gains rose to their highest level since 2008, and consumers voiced the... Continue reading
Posted Dec 12, 2014 at Tim Duy's Fed Watch