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Tim Duy
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FOMC doves squeezed out another victory at last week’s meeting. But can they do it again in December? As was widely expected, the Fed held rates steady at the September FOMC meeting. That said, the meeting was clearly divisive, with three dissents, all from regional bank presidents. And the accompanying statement leaned in a hawkish direction – the committee noted that near-term risks were “balanced” and that the case for a rate hike had “strengthened.” Moreover, only three of the participants did not expect a rate hike before year end. And if that was not enough, during her press conference,... Continue reading
Posted 3 days ago at Tim Duy's Fed Watch
A roundup of Fed-related stories and viewpoints ahead of the FOMC meeting. First, Jeanna Smialek at Bloomberg sees danger lurking in the new dot plot: Janet Yellen will frame a decision this week to forgo an interest-rate increase as necessary to achieve the Federal Reserve’s economic goals. Donald Trump and his supporters are likely to frame it as political. That’s because the central bank on Wednesday will also release fresh “dot plot” projections which will probably show policy makers see one quarter-point rate hike by the end of the year. Such a forecast would be widely interpreted as a sign... Continue reading
Posted Sep 20, 2016 at Tim Duy's Fed Watch
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The unemployment is closing in on the Fed's estimate of the natural rate of unemployment: Consequently, Fed hawks are pushing for a rate hike sooner than later in an effort to prevent the economy from "overhearing." This overheating is argued to set the stage for the next recession. For instance, see San Francisco Federal Reserve President John Williams: History teaches us that an economy that runs too hot for too long can generate imbalances, potentially leading to excessive inflation, asset market bubbles, and ultimately economic correction and recession. A gradual process of raising rates reduces the risks of such an... Continue reading
Posted Sep 6, 2016 at Tim Duy's Fed Watch
Thanks. You know what? I was at grad school with a Gretchen Mester. And sometimes that slips in without me thinking about it.
Toggle Commented Sep 6, 2016 on Rate Hike Hopes Fading Fast at Tim Duy's Fed Watch
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The next FOMC meeting is just two weeks away. Fed hawks had hoped that this was their moment in the sun. I suspect they will need to wait another three months before their next opportunity to act. Signs of a second half rebound are likely too tentative for the doves to tolerate a rate hike. I don't think they will roll over as easily as they did last December. The August employment report was not terrible. Not by any measure. On the positive side, labor supply is reacting to both demographic changes and stronger demand: The demographic shift - essentially,... Continue reading
Posted Sep 6, 2016 at Tim Duy's Fed Watch
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The August employment report has come to be seen as the deciding factor in the Fed's upcoming decision on rates. See Sam Fleming at the Financial Times here. Maybe this is the case, maybe not. I hope not. Hinging policy on the first print of nonfarm payrolls - a volatile, heavily revised number - would be pretty low quality policy making. I keep coming back to this by Federal Reserve Chair Janet Yellen from back in December: ...total real private domestic final purchases (PDFP)--which includes household spending, business fixed investment, and residential investment, and currently represents about 85 percent of... Continue reading
Posted Sep 1, 2016 at Tim Duy's Fed Watch
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As I mentioned in my last post, the Borneo river we traveled is not safe to drink. In addition to its use for washing and as a sewer, there are fairly extensive gold mining operations in the river. A typical gold mining barge: As you can tell, like the fishing boats, these are handmade. Very ingenious devices. The motors pump the silt from the bottom of the river over the chute at the of the barge. The heavier sentiments sift out, and I am told are subsequently treated with mercury to leach out the gold. Sometimes you will see a... Continue reading
Posted Aug 10, 2016 at Tim Duy's Fed Watch
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This post is not about monetary policy. No metaphors, no hidden messages. It is about orangutans. Mostly. Hot, humid weather greeted my family and freiends as we emerged from our plane. After many, many hours - days, actually - of travel, we finally had arrived in Panlangkaraya, Indonesia on the island of Borneo. If you have traveled to tropical lands, you know the feeling as the heavy air engulfs the tired and disoreinted traveler as they walk onto the tarmac. But you also know the feeling of excitement as you prepare for a completely new experience that is 180 degrees... Continue reading
Posted Aug 9, 2016 at Tim Duy's Fed Watch
How long can doves at the Federal Reserve stand their ground? The fight within the U.S. central bank continues at this week's Federal Open Market Committee (FOMC) meeting as both hawks and doves jockey for dominant position. This battle will go to the doves; the Fed is not expected to raise its interest rate target just yet. Both the hawks and the doves know this. Both camps also know that this meeting is about laying down markers for the September meeting. And while the doves have the upper hand this month, the current flow of data will increasingly place them... Continue reading
Posted Jul 26, 2016 at Tim Duy's Fed Watch
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Interesting mix of data today that will give monetary policymakers plenty of food for thought. My guess is that it will probably drive a deeper division in the Fed between those who looking to secure two hikes this year rather and those good with just one or none at all. Retail sales came in stronger than expected, although prior months were revised down. Various measures of sales excluding gas are perking up compared to last year: While prior expansions churned out some better spending numbers, the consumer is clearly not in some kind of recessionary free-fall. Remember, 2% growth is... Continue reading
Posted Jul 15, 2016 at Tim Duy's Fed Watch
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I snuck out of town last week and am catching up on Fed/economy news. Highlights from the past week: 1.) The labor report comes in better than expected. Nonfarm payrolls rose by 287k in June compared to the downwardly revised 11k gain in May. These results speak to the volatility typically seen in the employment data. See also Matthew Boesler on impact of end of the school year on the data. On a twelve month basis, job growth has eased only moderately. But on a three month basis, the slowdown is more pronounced: You have to decide if this is... Continue reading
Posted Jul 11, 2016 at Tim Duy's Fed Watch
The first Fed speaker of the post-Brexit era delivered a decidedly dovish message. Confirming the expectations of market participants, Federal Reserve Governor Jerome Powell made clear that the Fed was in a holding pattern until the dust settles. Much of the material is similar in content to his May speech, but the shift in emphasis and nuance indicate a substantially policy path. Powell summarizes the economic situation as: How should we evaluate our current performance against the dual mandate? I would say that we have made substantial progress toward maximum employment, although there is still some room for improvement. We... Continue reading
Posted Jun 28, 2016 at Tim Duy's Fed Watch
With global financial markets reeling in the wake of Brexit - Britain's unforced error as a political gamble went too far - the Fed is back on the sidelines. A July hike was already out of the question before Brexit, while September was never more than tenuous, depending on the data falling in place just right. Now September has moved from tenuous to "what are you thinking?" Indeed, the debate has shifted in the opposite direction as market participants weigh the possibility of a rate cut. The Fed is probably not there yet, but internally they are probably increasingly regretting... Continue reading
Posted Jun 27, 2016 at Tim Duy's Fed Watch
The best-laid plans can come undone by the tiniest of things. In this case a slip in the data—a low print on nonfarm payrolls that may prove no more than a statistical bump—put a June interest rate hike out of reach for the Federal Reserve and probably a July one as well. That leaves September in focus as the next chance for the U.S. central bank to tighten policy—if the data hold... Continued at Bloomberg.... Continue reading
Posted Jun 14, 2016 at Tim Duy's Fed Watch
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Federal Reserve Chair Janet Yellen has been vexed by an inflation problem. Now she is also vexed by an inflation expectations problem. Last week she said (emphasis added): Uncertainty concerning the outlook for inflation also reflects, in part, uncertainty about the behavior of those inflation expectations that are relevant to price setting. For two decades, inflation has been relatively stable, reacting less persistently than before to temporary factors like a recession or a swing in oil prices. The most convincing explanation for this stability, in my view, is that longer-term inflation expectations have remained quite stable. So it bears noting... Continue reading
Posted Jun 12, 2016 at Tim Duy's Fed Watch
Next week's meeting of the Federal Open Market Committee (FOMC) includes a press conference with Chair Janet Yellen. These are five questions I would ask if I had the opportunity to do so in light of recent events. 1. What's the deal with labor market conditions? You advocated for the creation of the Federal Reserve's Labor Market Conditions Index (LMCI) to serve as a broader measure of the labor market and as an alternative to a narrow measure such as the unemployment rate... Continues at Bloomberg.... Continue reading
Posted Jun 10, 2016 at Tim Duy's Fed Watch
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Lot's of Fed news over the past few days that add up to a simple takeaway: June is off the table (again), the stars have to align just right for a July rate hike (not likely), and September is coming into focus as the next possible rate hike opportunity. September, however, assumes that the employment report is more of an outlier than part of a trend. that's what the Fed will be taking out of the data in the coming months. Nonfarm payrolls grew by a disappointing 38K in May, low even after accounting for the Verizon strike. Downward revisions... Continue reading
Posted Jun 6, 2016 at Tim Duy's Fed Watch
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Last week Federal Reserve Chair Janet Yellen gave the green light for a rate hike this summer. Via the Wall Street Journal: “It’s appropriate…for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate,” she said during a panel discussion at the Radcliffe Institute for Advanced Study at Harvard University. This follows on the back numerous Fed speakers, as well as the minutes of the last meeting, that helped place June into play. Of course, Yellen's "coming months" could easily be beyond June, and I... Continue reading
Posted Jun 1, 2016 at Tim Duy's Fed Watch
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Federal Reserve Governor Jerome Powell kept the prospects for a near-term rate hike alive and well in a speech today: For the near term, my baseline expectation is that our economy will continue on its path of growth at around 2 percent. To confirm that expectation, it will be important to see a significant strengthening in growth in the second quarter after the apparent softness of the past two quarters. To support this growth narrative, I also expect the ongoing healing process in labor markets to continue, with strong job growth, further reductions in headline unemployment and other measures of... Continue reading
Posted May 26, 2016 at Tim Duy's Fed Watch
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In recent posts I highlighted the stagnant unemployment rate. I believe the Fed is on thin ice by raising rates when unemployment is moving sideways, especially when there exists evidence of substantial underemployment (see also this FEDS note). But there is also evidence of growing wage pressures, in particular the Atlanta Fed wage measure: Would wage growth continue to accelerate if unemployment persisted at current levels? If so, would this mean the Fed had reached a tolerable equilibrium? My answers are "possibly" to the former question, and "probably not" to the latter. Another way to consider the data is via... Continue reading
Posted May 24, 2016 at Tim Duy's Fed Watch
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I find the Fed's current obsession with raising interest rates curious to say the least. The basic argument for rate hikes is that the economy, and in particular the labor market, sustained its momentum in the last two quarters better than market participants believe. Given that the economy is near or beyond full employment, the lack of excess slack will soon manifest itself in the form of inflationary pressures. Hence, to remain ahead of the inflation curve and maximize the chance that rate hikes will be gradual, they need to soon raise rates. For instance, St. Louis Federal Reserve President... Continue reading
Posted May 23, 2016 at Tim Duy's Fed Watch
The June FOMC meeting is live. That message came through loud and clear in the minutes, and was subsequently confirmed by New York Federal Reserve President William Dudley. Last week, via Reuters: "We are on track to satisfy a lot of the conditions" for a rate increase, Dudley said. He added, though, that a key factor arguing for the Fed biding its time a little was the potential for market turmoil around Britain’s vote in late June about whether to leave the European Union... ..."If I am convinced that my own forecast is sort of on track, then I think... Continue reading
Posted May 22, 2016 at Tim Duy's Fed Watch
There is quite a bit of material in the minutes of the April 2016 FOMC meeting to work with, more than I have time for tonight. The central message of the minutes was that financial market participants were too complacent in their expectations that the Fed would stand pat in June. The Fed clearly made no such decision in April. Instead, meeting participants hotly debated the likelihood that a rate hike would be appropriate in June: Participants agreed that their ongoing assessments of the data and other incoming information, as well as the implications for the outlook, would determine the... Continue reading
Posted May 18, 2016 at Tim Duy's Fed Watch
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Incoming data continues to support the narrative that the US economy is not, I repeat, not, slipping into recession. Instead, the US economy is most likely continuing to chug along around 2 percent year over year. Not exciting, but not a disaster by any means. Indeed, for Fed officials thinking the rate of potential growth is hovering around 1.75 percent, it is enough to keep upward pressure on labor markets, pushing to economy further toward full employment. And if you think you want to hit the inflation target from below, then you need to hit the employment target from above.... Continue reading
Posted May 17, 2016 at Tim Duy's Fed Watch
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Market participants place less than 10 percent chance of a rate hike in June. In contrast, San Francisco Federal Reserve President John Williams continues hold out hope for a third. Via Reuters: Two to three rate increases this year "definitely still makes sense," he said... Williams, a centrist whose views are generally in line with those of Fed Chair Janet Yellen, said he has not yet conferred with his staff economists over whether the next rate increase would be best made in June, July or September... ...With most gauges of the labor market suggesting the United States is at or... Continue reading
Posted May 16, 2016 at Tim Duy's Fed Watch