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Tim Duy
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The labor market finished out the year on a solid note. Solid, not spectacular, and largely consistent with the Fed's expectations. Consequently, the final employment report for 2016 should not impact the Fed's median forecast for 75bp of rate hikes in 2017. Payrolls rose 156k in December and jobs gains the previous two months were revised upwards by 19k. While good numbers, job growth continues to slow: Since January 2015, the 12-month moving average of monthly job growth slowed from 262k to 180k. Still, that remains greater than the pace necessary to hold the unemployment rate constant once the demographic... Continue reading
Posted Jan 6, 2017 at Tim Duy's Fed Watch
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In the most recent Summary of Economic Projections, Fed officials penciled in three 25bp rate hikes for 2017. The reality, however, could be very different. We all remember how “four” became “one” in 2016. The median dots are neither a promise nor an official forecast. As 2016 progressed, forecasts associated with a lower path of SEP “dots” evolved as the consensus view of policymakers. Will the same happen this year? I don’t think so; it is hard to see the Fed on pause for another twelve months. As a starting point, I think it best to assume the US economy... Continue reading
Posted Dec 27, 2016 at Tim Duy's Fed Watch
I have been puzzling over this from Paul Krugman: Donald Trump won the electoral college at least in part by promising to bring coal jobs back to Appalachia and manufacturing jobs back to the Rust Belt. Neither promise can be honored – for the most part we’re talking about jobs lost, not to unfair foreign competition, but to technological change. But a funny thing happens when people like me try to point that out: we get enraged responses from economists who feel an affinity for the working people of the afflicted regions – responses that assume that trying to do... Continue reading
Posted Dec 15, 2016 at Tim Duy's Fed Watch
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The FOMC raised the target range for the federal funds rate by 25bp today, as expected. But the tone of the press conference and the summary of economic projections were more hawkish than I anticipated. The Fed is shifting gears, a shift I did not expect until more data piled up in the first quarter of 2017. My error in analyzing this meeting was thinking that the Fed would nudge down the longer term estimate of unemployment - essentially, the natural rate of unemployment - on the basis the 4.6% unemployment rate in November. Such a downward drift happened in... Continue reading
Posted Dec 14, 2016 at Tim Duy's Fed Watch
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The Federal Reserve will nudge rates 25bp higher this week. This will not end the policy tension among FOMC members. How will that unfold in 2017? My expectation is that whereas 2016 began with excessively high expectations for rate hikes, 2017 will be the opposite. My tendency is think that the risks to the Fed’s median forecast of 50bp of rate hikes in 2017 are more weighted to the upside than the downside. Beware then of a more aggressive than expected Fed. The FOMC statement represents a compromise position. Broadly speaking, some policymakers rely on earlier paradigms calling for preemptive... Continue reading
Posted Dec 12, 2016 at Tim Duy's Fed Watch
President-Donald Trump’s renewed call for a 35% import tax on firms that ship jobs out of the United States triggered the expected round of derision from an array of critics, both on the left and the right. The critics are correct. It is indeed a terrible idea. One sure way to discourage job creation in the US is to guarantee that firms will be punished if they need to layoff employees in the future. It is just bad policy, plain and simple. But if that’s your takeaway, I think you are making a mistake. Whether or not Trump can or... Continue reading
Posted Dec 4, 2016 at Tim Duy's Fed Watch
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Paul Krugman on the election: The only way to make sense of what happened is to see the vote as an expression of, well, identity politics — some combination of white resentment at what voters see as favoritism toward nonwhites (even though it isn’t) and anger on the part of the less educated at liberal elites whom they imagine look down on them. To be honest, I don’t fully understand this resentment. To not understand this resentment is to pretend this never happened: “You know, to just be grossly generalistic, you could put half of Trump’s supporters into what I... Continue reading
Posted Nov 27, 2016 at Tim Duy's Fed Watch
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Posted Nov 21, 2016 at Tim Duy's Fed Watch
Rent or buy? Often I am asked this question, and I find I lack a satisfactory answer. I realize that people who ask me this question are typically in transitional phases in their lives – moving from young adulthood to real adulthood. The answer is perhaps more obvious on either side of that inflection point, less so in the middle of it. From my experience, these are the pros and the cons: Pros. You earn the untaxed imputed rent (you pay yourself rent) and receive a tax deduction on your mortgage interest. Double subsidy. Assuming a fixed rate mortgage, you... Continue reading
Posted Nov 17, 2016 at Tim Duy's Fed Watch
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Some back of the envelope calculations: The Fed's long-run real GDP growth estimate - the rate of potential GDP growth - is 1.8%. According to Federal Reserve Vice Chair Stan Fischer last week: If labor force participation was to remain flat, job gains in the range of 125,000 to 175,000 would likely be needed to prevent unemployment from creeping up. However, if labor force participation was to decline, as might be expected given demographic trends, the neutral rate of payroll gains would be lower. If we assumed a downward trend in participation of about 0.3 percentage point per year, in... Continue reading
Posted Nov 14, 2016 at Tim Duy's Fed Watch
As expected, the Federal Reserve left policy unchanged this month. The statement itself was largely unchanged as well. The near term inflation outlook improved, going from this is in September: Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. To this in November: Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past... Continue reading
Posted Nov 2, 2016 at Tim Duy's Fed Watch
This from Bloomberg surprised me: Michael Gapen, chief U.S. economist at Barclays Plc in New York, said Fischer’s comments “reflect an ongoing divergence of opinion” at the central bank. Fischer “doesn’t see much room for running the economy hot” while Yellen’s views “seem to provide a wide-open door to do that. You have a chair and a vice chair who see policy differently right now,” he said. I don't think there exists a yawning gap between Federal Reserve Vice-Chair Fischer and Federal Reserve Vice Chair Yellen. The perception of this gap stems in part from what I think was an... Continue reading
Posted Oct 17, 2016 at Tim Duy's Fed Watch
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Federal Reserve hawks face an array of labor market data that threatens a key pillar holding up their policy view. That pillar is the assertion that monthly nonfarm payroll growth over roughly 100k will soon force unemployment far below the natural rate, thus placing the US economy in grave danger from inflationary forces. By this view, the decline of unemployment long ago justified further rate hikes. Hawks failed to anticipate that the unemployment rate would flatten out at 5 percent despite steady payrolls growth. This outcome does not fit in their worldview. Fundamentally, they were supply-side pessimists. The recent strength... Continue reading
Posted Oct 10, 2016 at Tim Duy's Fed Watch
If there is one thing that I am fairly sure that monetary policymakers hate, it is the idea that the outcomes of their meetings are preordained. November appears to be just such a meeting. To be sure, Fed hawks want to believe the meeting is "live." The sizable group that dissented - or would have dissented if they were voting members - likely sees the case for a rate hike in November as even more pressing than in September. Remember, it is all about preemptive policy action from that contingent. If you thought delay was bad in September, it must... Continue reading
Posted Oct 5, 2016 at Tim Duy's Fed Watch
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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 Sep 26, 2016 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