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Tim Duy
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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 4 days ago 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 6 days ago 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 7 days ago 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
And I knew that but wrote it anyway!
Toggle Commented May 13, 2016 on Fed Speak, Claims at Tim Duy's Fed Watch
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The Fed is not likely to raise rates in June. But not everyone at the Fed is on board with the plan. Serial dissenter Kansas City Federal Reserve President Esther George repeated her warnings that interest rates are too low: I support a gradual adjustment of short-term interest rates toward a more normal level, but I view the current level as too low for today’s economic conditions. The economy is at or near full employment and inflation is close to the FOMC’s target of 2 percent, yet short-term interest rates remain near historic lows. Her motivation stems primarily from concerns... Continue reading
Posted May 12, 2016 at Tim Duy's Fed Watch
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At the beginning of last week, monetary policymakers were trying to keep the dream of June alive. Via Bloomberg: “I would put more probability on it being a real option,” Lockhart told reporters at the Atlanta Fed’s financial markets conference at Amelia Island, Florida, when asked about the low implied odds of a move next month. “The communication of committee participants and members between now and mid-June obviously should try to prepare the markets for at least a realistic range of possibilities” for the next policy meeting... ...Williams, a former head of research to Fed Chair Janet Yellen, said he... Continue reading
Posted May 9, 2016 at Tim Duy's Fed Watch
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The Fed has proven very dovish since their December rate hike. Tumultuous financial markets gave the Fed doves the upper hand, leading the Fed to pause in it’s “normalization” campaign and cut in half the expected pace of rate hikes this year. But be prepared for the tenor of the song to change. I would not be surprised to see doves shedding their feathers to reveal the hawk underneath. Boston Federal Reserve President Eric Rosengren exemplifies this shift. Twice in recent weeks, Rosengren, typically considered a notable dove, warned that financial markets were underestimating the odds of rates hikes this... Continue reading
Posted Apr 29, 2016 at Tim Duy's Fed Watch
The Fed will stand pat this week. We know it, they know it. So what then will the Fed talk about for two days? The April meeting of the Federal Open Market Committee (FOMC) will be about the June meeting. Policymakers' fundamental challenge is that the FOMC doesn't want to rule out a June hike, but the markets already have. They need to decide if they want to make a play for a June hike and how to communicate such a message. They'll probably want to keep the option for a June hike open and hence will alter this week’s... Continue reading
Posted Apr 26, 2016 at Tim Duy's Fed Watch
The Federal Reserve formally adopted a 2 percent inflation target back in January of 2012. Policymakers at the central bank amended their objective this year to clarify that they expect "symmetric errors" around the target; in other words there is the possibility of the central bank overshooting or undershooting its self-proclaimed goal on inflation. Despite this clarification, concerns about the Fed’s commitment to the target persist and have intensified following Fed Chair Janet Yellen's speech last month. Even before then, however, it was easy to see why such worries existed. The central bank began the process of policy “normalization,” first... Continue reading
Posted Apr 7, 2016 at Tim Duy's Fed Watch
The FOMC minutes indicates the Fed is just a dovish as believed. This was somewhat surprising given the tendency of minutes to have a more balanced perspective which would appear to be hawkish relative to current market expectations. But not this time. This time the message was fairly clear: They can't ignore the asymmetry of policy risks any longer. Gradual went to glacial, with April now off the table, leaving June as the next possible data for a rate hike. Expect Fedspeak to sound somewhat hawkish given they will want to keep June on the table - but I am... Continue reading
Posted Apr 6, 2016 at Tim Duy's Fed Watch
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Despite some occasionally hawkish rhetoric from a handful of disaffected Federal Reserve bank presidents, expect the Fed to remain on hold until inflationary threats clearly emerge. In practice, that means the Fed is not likely to raise rates until the unemployment rate resumes its downward trajectory. Soft though generally positive data coupled with market turbulence over the winter scared most policymakers straight with regards to their overly-optimistic plans to normalize policy. The risks to the outlook are simply too one-sided too believe this is anything like the tightening cycles of the past. Generally positive incoming data continues to defy the... Continue reading
Posted Apr 5, 2016 at Tim Duy's Fed Watch
As 2016 began to evolve, it quickly became apparent that Federal Reserve Chairman Janet Yellen faced the very real possibility that her legacy would amount to being just another central banker who failed miserably in their efforts to raise interest rates back into positive territory. The Federal Reserve was set to follow in the footsteps of the Bank of Japan and the Riksbank, seemingly oblivious to their errors. In September of last year, a confident Yellen declared the Fed would be different. From the transcript of her press conference: ANN SAPHIR. Ann Saphir with Reuters. Just to piggyback on the... Continue reading
Posted Apr 1, 2016 at Tim Duy's Fed Watch
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In an IMF blog post, Maurice Obstfeld, Gian Maria Milesi-Ferretti, and Rabah Arezki offer a solution to the "puzzle" of the weak positive macroeconomic response to low oil prices. Specifically, they posit a sharp rise in real interest rates due to falling inflation expectations is the culprit: Even though oil is a less important production input than it was three decades ago, that reasoning should work in reverse when oil prices fall, leading to lower production costs, more hiring, and reduced inflation. But this channel causes a problem when central banks cannot lower interest rates. Because the policy interest rate... Continue reading
Posted Mar 28, 2016 at Tim Duy's Fed Watch
Narayana Kocherlakota and David Andolfatto have been discussing the issue of Fed credibility. This is my effort to weigh in on the topic. I break the issue of credibility of monetary policy into two parts. The first I think of as “soft” credibility, or the perception that policy needs to follow a proscribed course due to some perceived promise. The second I think of as “hard” credibility, or the expectation that policymakers will pursue policies that maximize its odds of achieving its goals over the long run, price stability with maximum sustainable employment, regardless of perceived promises. We should encourage... Continue reading
Posted Mar 24, 2016 at Tim Duy's Fed Watch
Federal Reserve Vice Chairman Stanley Fischer sits on Chair Janet Yellen’s left shoulder, muttering: … we may well at present be seeing the first stirrings of an increase in the inflation rate … Fed Governor Lael Brainard perches on the right, whispering: … there are risks around this baseline forecast, the most prominent of which lie to the downside. Yellen is caught in a tug of war between Fischer and Brainard. At stake is the Fed chair’s willingness to embrace a policy stance that accepts the risk that inflation will overshoot the U.S. central bank’s target. At the moment, Brainard... Continue reading
Posted Mar 15, 2016 at Tim Duy's Fed Watch
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We are heading into the March FOMC meeting next week. The recessionistas are on the sidelines, waiting for data to turn in their favor. I suspect they have a long wait. In the meantime, FOMC participants will hone their arguments as they prepare for what is likely to be a contentious meeting. At stake is not a decision of rates; they will hold steady. At stake is a decision on the balance of risks. Do they want to send a dovish, neutral, or hawkish signal for the April and June meetings? I expect them to default to the neutral/dovish side.... Continue reading
Posted Mar 7, 2016 at Tim Duy's Fed Watch
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The beleaguered manufacturing sector saw an uptick in February, at least according to the ISM report: This information builds on the stronger consumer spending and inflation numbers we saw last week. Not to mention solid auto sales for February. The news is sufficiently good that Torsten Sløk of Deutsche Bank argues (via Business Insider) that the Fed should raise rates: Today we got more confirmation that the negative effects of dollar appreciation on the US economy are starting to fade, see the first chart below. Specifically, we have in recent months seen a solid turnaround in the employment data for... Continue reading
Posted Mar 1, 2016 at Tim Duy's Fed Watch
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The Personal Income and Outlays report for January delivered a surprise for the Fed doves. It does not, however, derail their push for a March pause. I believe policymakers will still take a pass on the March meeting as they assess the impact of recent market unpleasantness. But if markets calm further ahead of the March meeting and data remains solid, beware that they may choose to re-instate the balance of risks into the FOMC statement. Furthermore, sufficiently supportive data may induce them to shift the risks to the upside to signal the hope of a June hike. Real personal... Continue reading
Posted Feb 29, 2016 at Tim Duy's Fed Watch
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Today Richmond Federal Reserve President Jeffrey Lacker argued that the case for rate hikes remains intact, arguing that monetary policy remains quite accommodative: So at this point, estimates of the natural real rate of interest do not suggest that the zero lower bound is impeding the Fed’s ability to attain its 2 percent inflation objective. In fact, this perspective would bolster the case for raising the federal funds rate target. And in he is quoted by Reuters adding: Ongoing strength in the U.S. job market could give the Federal Reserve justification for multiple interest rate increases this year, Richmond Fed... Continue reading
Posted Feb 24, 2016 at Tim Duy's Fed Watch
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The Fed will almost certainly pause in March. But not all Fed presidents are leaning that way. And at least one seems to be shifting closer to March than further away. At the end of January, San Francisco Federal Reserve President John Williams had this to say, via Reuters: San Francisco Federal Reserve Bank President John Williams told reporters he now sees slightly slower growth, slightly higher unemployment, and about a tenth of a percent lower inflation this year than he had expected in December, when the Fed raised rates for the first time in nearly a decade... ..."Standard monetary... Continue reading
Posted Feb 23, 2016 at Tim Duy's Fed Watch
So much Fed, so little time. But the short story is this: The Fed is in risk management mode, which means they will leave rates on hold until they see clear evidence that markets are stabilizing, growth remains on track, and they are even leaning towards needing to see the white in the eyes of the inflation beast. This has the makings of a significant strategic shift. To date, the Fed has argued for early and modest action toward "normalizing" policy with the ultimately goal of staying ahead of the inflation curve. We are moving to a new strategy where... Continue reading
Posted Feb 17, 2016 at Tim Duy's Fed Watch