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Tim Duy
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Equities have renewed their rally -- and so have bonds, and that is creating much alarm among some investors. Whereas the former suggests the stage is set for solid growth, the latter and the accompanying narrowing of the yield curve raises red flags about the health of the economy. I am not sure there is much of a puzzle here. This dichotomy is fairly typical of a monetary tightening cycle and can exist for a long time. How long? Until the Federal Reserve finally snuffs out the expansion with excessively tight monetary policy... Continued at Bloomberg View... Continue reading
Posted 3 days ago at Tim Duy's Fed Watch
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The Federal Reserve released March industrial production data today. Overall production was up 0.5% supported by a big jump in utilities. Despite the headline gains, it was something of a mixed message. First, the dispersion of weakness was the lowest since 2014: It looks like with the rebound in energy prices and related production activity, the industrial side of the economy has turned a corner. On a softer note, manufacturing activity tumbled: This was fairly disappointing considering the long run of solid growth beginning in the second half of last year. Slowing motor vehicle production took a bite out of... Continue reading
Posted Apr 18, 2017 at Tim Duy's Fed Watch
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First quarter growth is likely to fall flat - at least that is the signal from numerous forecasters and the Atlanta Fed. But what does it mean for Fed policy? Probably not much for now. It will leave policymakers a little cautious as we head toward the June FOMC meeting (May seems most likely a off the table for policy action). But mostly the Fed will be watching incoming data from the end of the first quarter and the beginning of the second. If the data flow picks up over the next couple of months, they will likely move forward... Continue reading
Posted Apr 17, 2017 at Tim Duy's Fed Watch
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Labor markets were generally solid in March, with nothing by itself to dissuade the Fed from its current path. We should be watching for the Fed reaction to the decline in the unemployment rate, assuming it persists in the coming months. Could be dovish if the Fed lowers its estimate of the natural rate. Could be hawkish if they see a higher risk of undershooting the natural rate. Nonfarm payroll growth slowed to 98k: While this was below expectations, it wasn't a surprise. My interpretation is that most analysts expected downside risk to the estimates based on cold weather in... Continue reading
Posted Apr 10, 2017 at Tim Duy's Fed Watch
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It seems that we are conditioned for a disappointing jobs report tomorrow. Although the ADP report came in strong, we have mixed signals from the employment components of the ISM reports, with the employment index up in manufacturing but down in the much bigger service sector. In addition, weather may be a factor - did warm weather goose the January and February numbers and now we will see payback due to a cold March? I expect that the Fed will be expecting the latter. The minutes suggest they are already primed for weaker first quarter numbers to begin with: Participants... Continue reading
Posted Apr 6, 2017 at Tim Duy's Fed Watch
The minutes of the March FOMC meeting confirmed that the Fed remains poised to tighten policy further, first via raising the federal funds rate followed by action to reduce the balance sheet later in the year. It appears most likely that the Fed will see the latter as a substitute for the former. That means rate hikes would perhaps be on hold during the start of 2018 as the Fed assesses the efficacy of its actions. To be sure, however, the pace and mix of tightening remain data dependent. With the Fed in general agreement that the economy is near... Continue reading
Posted Apr 5, 2017 at Tim Duy's Fed Watch
Federal Reserve officials continue to anticipate additional monetary policy tightening this year on the order of another two interest-rate increases. They have no reason to back down just yet. The weakness seen in “hard” economic data based on actual performance relative to “soft” data, such as surveys, is enough to temper concerns that they are falling behind the curve and keeps a May move off the table. That means they can be patient and adjust their forecasts, if necessary, before the June 14 meeting... Continued at Bloomberg Prophets... Continue reading
Posted Apr 5, 2017 at Tim Duy's Fed Watch
In case you missed it last week: ...Policy makers see themselves as dancing on a fine line. Too much tightening and they leave the economy weakened and vulnerable to negative shocks. Too little and they set the stage for inflation that they are unable to get under control. But if the Fed can hold that line, it will extend the life of this expansion and maximize employment over the medium to long run. Lacking precise policy tools, however, requires the Fed to seemingly lurch between hike and halt, leaving it open to criticism... Full story on Bloomberg. Continue reading
Posted Mar 27, 2017 at Tim Duy's Fed Watch
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I have seen some angst recently over declining growth in commercial bank lending. See, for example, the Wall Street Journal: Bank loans across all categories are increasing 4.6% annually, the slowest pace since 2014, according to weekly Fed lending data from March 1. The trend is particularly marked in business loans, which are increasing 3.9% annually, a rate that is a nearly six-year low. A number of factors are at play, including rising interest rates; bankers also said some business clients put borrowing on hold before the U.S. election and aren't confident enough to jump back in. The slowdown is... Continue reading
Posted Mar 22, 2017 at Tim Duy's Fed Watch
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The Federal Reserve begins its two-day meeting today. The outcome of the meeting is no longer in debate. A 25bp rate hike is widely expected after a round of Fedspeak in the week prior to the blackout period and the February employment report. More important now is what signal the Fed sends with the statement, the press conference, and the dots. I anticipate the overall message to signal general confidence in the economic outlook while reinforcing the idea that the Fed is neither behind the curve nor intends to fall behind the curve. The combination will give the Fed room... Continue reading
Posted Mar 13, 2017 at Tim Duy's Fed Watch
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If there was truly any potential impediment to a rate hike from the Fed this week, it would have come from a weak employment report. The employment report was decidedly not weak. Instead, it finished paving the way to a Fed rate hike. Not enough yet, however, to justify a dramatic acceleration in the pace of future rate hikes, implying only a 25bp upward nudge in the Fed's rate projections for 2017. Nonfarm payroll growth came in above expected at 235k: The number may have been boosted by mild weather in February. Still, the underlying pace of growth in recent... Continue reading
Posted Mar 12, 2017 at Tim Duy's Fed Watch
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My students were required to forecast the change in the change in nonfarm payrolls for February. The class consensus is 180k. The forecasts come from an ARMA model and hence are not informed by this week's ADP number. Continue reading
Posted Mar 9, 2017 at Tim Duy's Fed Watch
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Arguably, the Fed took the mystery out of this next FOMC meeting by fairly clearly signaling a rate hike is coming. What could hold them back at this point? Only a complete disaster of an employment report. And today's ADP number suggests that's very, very unlikely. Indeed, if the ADP number translates into a blowout employment report, the Fed probably didn't need to signal as aggressively as they did about this next meeting. The data would have brought market expectations to the same place. Calculated Risk provides a preview of the February employment report, concluding that he will take the... Continue reading
Posted Mar 8, 2017 at Tim Duy's Fed Watch
Following up on my piece this morning at Bloomberg, it is worth going into a little deeper detail on New York Federal Reserve President William Dudley’s comments. I think in this interview Dudley is doing a good job explaining policy in terms of the forecast. That is something the Fed needs to keep pushing. It doesn’t sound like the forecast or the risks have moved sufficiently to change the number of rate hikes expected this year. But he sure seems to be leaning toward pulling forward those hikes. The CNN interview starts hawkish. What does “fairly soon” mean? According to... Continue reading
Posted Mar 1, 2017 at Tim Duy's Fed Watch
When it comes to the meetings of the Federal Open Market Committee, not all central bank policy makers are created equally. There are “participants” -- all the policy makers in the room -- and there are “members,” those who have a vote. It is important to keep this distinction in mind when reading the minutes of the FOMC meetings -- especially because many of the more hawkish members of the Fed are participants, not members. Continued at Bloomberg Prophets... Continue reading
Posted Feb 23, 2017 at Tim Duy's Fed Watch
The U.S. economy is poised to deliver on the Federal Reserve’s economic forecast for this year. That means a baseline outlook for three interest-rate increases remains in play -- though not the way market may be anticipating. Think of it as two rate hikes, one each in June and December, with an option for a third in September. Continued at Bloomberg Prophets.... Continue reading
Posted Feb 21, 2017 at Tim Duy's Fed Watch
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Federal Reserve Governor Stanley Fischer gave a very nice speech this weekend that shed light on the current monetary policymaking process. I found three points particularly notable. First: One important but underappreciated aspect of the SEP is that its projections are based on each individual's assessment of appropriate monetary policy. Each FOMC participant writes down what he or she regards as the appropriate path for policy. They do not write down what they expect the Committee to do. Yet the public often misinterprets the interest rate paths we write down as a projection of the Committee's policy path or a... Continue reading
Posted Feb 13, 2017 at Tim Duy's Fed Watch
The countdown to the Federal Reserve's next policy meeting in mid-March has begun, and so have the pleadings of some central bank officials desperately trying to suggest the meeting is “live.” Market participants remain wary -- and rightfully so -- that the Fed might pull the trigger on another interest-rate increase before June. Continued at Bloomberg Prophets... Continue reading
Posted Feb 13, 2017 at Tim Duy's Fed Watch
Having tipped their toes in the water with two interest-rate hikes -- and more expected to come -- the Federal Reserve officials have begun the discussion about reducing the size of the central bank’s $4.45 trillion balance sheet. To date, they have tended to look at interest rate-policy as separate from balance-sheet policy. Once the former is heading toward normalization, then they can begin the latter... Continued at Bloomberg Prophets... Continue reading
Posted Feb 10, 2017 at Tim Duy's Fed Watch
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The FOMC meeting came and went with little fanfare this week. As expected, there was no policy change, with only small modifications to post-meeting statement. With only small changes, it is a struggle to read much into the statement. Some thoughts: Business investment. The Fed drew attention to weak business investment. The recent gains in core capital goods orders and improving ISM manufacturing numbers could be pointing to an upturn in the months ahead, possibly enough to boost growth estimates. Keep an eye on this space. Business/Consumer Confidence. The Fed cited the post-Trump improvement in confidence. These gains, however, could... Continue reading
Posted Feb 2, 2017 at Tim Duy's Fed Watch
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Former Federal Reserve Governor Kevin Warsh’s column in Tuesday’s Wall Street Journal was so riddled with errors and misperceptions that it is hard to believe he was actually a governor. Warsh wants the Fed to announce a “practicable long-term strategy and stick to it,” claiming they have offered many such plans but never stuck to them. I don’t agree. The Fed has a plan, but Warsh just refuses to see it. The former governor’s first critique: A year ago around this time, the U.S. stock market fell about 10%. The Fed reacted precipitously, reversing its announced plan for 2016 of... Continue reading
Posted Jan 31, 2017 at Tim Duy's Fed Watch
The Federal Reserve is laying the groundwork for shrinking its $4.45 trillion balance sheet. But don’t panic yet, bond traders. This isn’t 2013. Continued at Bloomberg Prophets... Continue reading
Posted Jan 30, 2017 at Tim Duy's Fed Watch
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The Fed will take a pass at this week’s FOMC meeting. The median policy participant forecasts just three 25bp rate hikes this year and incoming data offers no surprises to force one of those this month. March, however, remains in play. The three forecasted rate hikes is not a promise. It could be one hike or could be four or more. The actual outcome will depend on the path of actual economic outcomes and what those outcomes imply for the forecast. The Fed is aware that crosscurrents in the economy – such as potentially significant changes to fiscal and economic... Continue reading
Posted Jan 29, 2017 at Tim Duy's Fed Watch
Federal Reserve Chair Janet Yellen made it clear in a recent speech that monetary policy wouldn't immediately be affected by the changing of the guard in Washington. It isn't the short-term that’s worth worrying about, but the long-term and the potential for new Fed governors to be neither objective nor divorced from political pressures... Continues at Bloomberg Prophets... Continue reading
Posted Jan 24, 2017 at Tim Duy's Fed Watch
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In my last post, I asserted: The actual amount of tightening will ultimately depend on the evolution of the forecasts for unemployment and inflation. If the expectation for unemployment drifts lower for this year, for instance, the median dots are likely to shift higher to ensure that the Fed continues to meet its mandate. Can we quantify the impact of a changing economic forecast on the projected amount of tightening this year? Yes, using the methodology of Federal Reserve Bank of San Francisco economists Fernanda Nechio and Glenn Rudebusch. In a recent article, they argue the change in the Federal... Continue reading
Posted Jan 24, 2017 at Tim Duy's Fed Watch