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Tim Duy
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The Federal Reserve’s unemployment forecast doesn’t add up. It is neither consistent with the median of policy makers’ growth forecasts nor consistent with Chair Janet Yellen’s description of labor market strength. Hence, central bankers will likely find unemployment undershooting their forecast in the second half of 2017. That will keep the central bank in a hawkish mood even if lackluster inflation continues. Continued at Bloomberg Prophets... Continue reading
Posted 4 days ago at Tim Duy's Fed Watch
The recent inflation data doesn't exactly support the Federal Reserve’s monetary tightening plans. Chair Janet Yellen and her colleagues will surely take note of the weakness at this week’s Federal Open Market Committee meeting, but they will downplay any such concerns as transitory. At the moment, low unemployment remains the focus. Add to that loosening financial conditions and you get a central bank that is more likely than not to stay the course on its plan to hike interest rates. Continued at Bloomberg Prophets.... Continue reading
Posted Jun 13, 2017 at Tim Duy's Fed Watch
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Over at Project Syndicate, Brad DeLong takes issue with Fed policy decisions. Importantly, he identifies, correctly, that the Fed's forecasting record in recent years has been less than optimal. Much less. The repeated optimism that inflation will soon revert to target is a most significant problem for a central bank with a formal inflation target. On this point the Fed has faced disappointment time and time again. Brad is correct in his summary that the Fed needs to reassess its forecasting methodology to ensure that it is not biased toward high inflation forecasts. That said, I believe the issue is... Continue reading
Posted Jun 6, 2017 at Tim Duy's Fed Watch
The current U.S. economic expansion is one of the longest on record. The longer it lasts, the more likely growth will become tepid and uneven, raising angst about its sustainability. See the May employment report, with its disappointing 138,000 gain in payrolls, downward revisions to previous months, and soft wage growth. Yet, at the same time, the unemployment rate fell to the lowest level since 2001. Anxiety is elevated with speculation that the Trump administration's pro-growth, fiscal stimulus plans are on the ropes. Continue reading at Bloomberg Prophets... Continue reading
Posted Jun 5, 2017 at Tim Duy's Fed Watch
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Federal Reserve policymakers are turning a cautious eye to the inflation numbers, but for now believe special factors account for much of the weakness. Consequently, they remain more focused on the labor market in their policy deliberations. For now, that implies they will resist changing their expectations of further tightening this year as the US jobs market continues to hold strong. Tomorrow we should see more evidence of that strength. Inflation continues to come in below expectations. The latest PCE inflation report, for example, was better than March but still anemic: This weakness has not gone unnoticed on Constitution Ave,... Continue reading
Posted Jun 1, 2017 at Tim Duy's Fed Watch
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The minutes of the May Federal Reserve meeting reveal central bankers remained poised to raise interest rates again in June: With respect to the economic outlook and its implications for monetary policy, members agreed that the slowing in growth during the first quarter was likely to be transitory and continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, labor market conditions would strengthen somewhat further, and inflation would stabilize around 2 percent over the medium term… …Members generally judged that it would be prudent to await additional evidence... Continue reading
Posted May 25, 2017 at Tim Duy's Fed Watch
The Federal Reserve can’t catch a break on the inflation numbers, which are simply not helping in its drive to normalize monetary policy. Monetary policy makers have three possible responses to the weak inflation data. First, they can define down the extent of an acceptable miss on their target. Second, they can dismiss the numbers as transitory and focus instead on full employment. Third, they can rethink their estimates of full employment and the subsequent implications for the path of interest rates... Continue reading at Bloomberg Prophets... Continue reading
Posted May 18, 2017 at Tim Duy's Fed Watch
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Call it the revenge of the hard data. Industrial production popped in April while the number of sectors contracting fell sharply: Manufacturing itself enjoyed a healthy monthly gain: One point to watch is the improvement in automobile assemblies: Given tepid auto sales, this may add to inventories and ultimately place downward pressure on car prices. Housing starts remained solid in April: To be sure, the volatile multi-family component slid, but I think that should not be unexpected. Apartment construction bounced backed more quickly after the recession and I suspect has peaked. More of the action should now be in the... Continue reading
Posted May 16, 2017 at Tim Duy's Fed Watch
The unemployment rate continues to slide, hitting 4.4 percent in April. The Federal Reserve’s median forecast for joblessness -- 4.5 percent from the end of 2017 through 2019 -- has once again proved optimistic. But does this mean that Fed officials will hike their interest rate projections at the next Open Market Committee meeting? Continued at Bloomberg Prophets... Continue reading
Posted May 10, 2017 at Tim Duy's Fed Watch
The Federal Reserve receives a lot of criticism for the way it conducts monetary policy, but it shouldn’t be faulted for delivering a hawkish message at last week’s policy meeting in the face of data showing a marked slowdown in first-quarter growth. The May meeting came off largely as expected, with policy makers leaving interest rates unchanged and the post-meeting statement containing a clear message that policy makers remained set on a June rate hike... Continued at Bloomberg Prophets... Continue reading
Posted May 9, 2017 at Tim Duy's Fed Watch
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Tomorrow the Bureau of Labor Statistics releases the employment report for April. The Fed has their eyes set on a June rate hike on the expectation that first quarter weakness was largely temporary. The April and May employment reports will be crucial to evaluating the call. But note they do not have to be blowout reports to justify a rate hike. They just need to show solid job growth reasonably north of 100k a month. At that pace, the Fed would anticipate, in the absence of additional rate hikes, further declines in the unemployment rate and excessive inflationary pressure. I... Continue reading
Posted May 4, 2017 at Tim Duy's Fed Watch
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 Apr 27, 2017 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