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Tim Duy
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Some quick thoughts for the day. First, New York Federal Reserve President William Dudley gave an extended interview to the Associate Press. Definitely worth the time to read. Some highlights: 1.) Dudley never put a Trump bump in his forecast, so his forecast is essentially unchanged: I think we’re still on the same trajectory we’ve been on for several years. Above trend growth, gradually tightening labor market, inflation -- somewhat below our objective -- but we do expect as the labor market continues to tighten, to see firmer wage gains and that will ultimately filter into inflation moving up towards... Continue reading
Posted 6 days ago at Tim Duy's Fed Watch
The Federal Reserve has an opportunity to test a hypothesis critical to the health of the U.S. economy: Can persistently loose monetary policy boost the pace of productivity growth? Sadly, for now, an adherence to a strict Phillips curve framework for the economy and fear of financial instability will prevent the Fed from venturing down this path. Continued at Bloomberg Prophets... Continue reading
Posted 6 days ago at Tim Duy's Fed Watch
Vox has an article out this morning with the title "The real "deep state" sabotage is happening at the Fed." It begins: Trump administration officials are notorious for their suspicion that a “deep state” of career military, intelligence, diplomatic, or civil service professionals is seeking to sabotage their work. But for a clearer example of sabotage — albeit without much in the way of a conspiracy — Trump would do well to cast his gaze at the Federal Reserve, which, dating back to before his inauguration, has been waging war on an inflationary menace that appears not to exist. I... Continue reading
Posted 7 days ago at Tim Duy's Fed Watch
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Along with every decent employment report comes the efforts to debunk that report. I see that an article from Pedro Nicolaci Da Costa at Business Insider is making the rounds tonight. In it Da Costa directs us to this in particular from Komal Sri-Kumar: The plight of low-income workers is underlined by yet another statistic. According to BLS numbers, 7.6 million workers held multiple jobs last month, up 2% from 7.4 million in July 2016. The principal reason workers hold more than one position is that no single job provides a sufficient income. In a robust economic recovery, the number... Continue reading
Posted Aug 8, 2017 at Tim Duy's Fed Watch
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The July employment report came in on the high side of expectations and sufficiently strong to keep the Fed's policy plans for this year and next intact despite low inflation. On average central bankers will have a hard time backing down from rate hike plans with job growth still in excess of that necessary to hold unemployment stable. They may believe the economy is not yet at full employment, but they don't want to be too far below their estimate of the neutral interest rate before they hit full employment. And they don't think that point can be very far... Continue reading
Posted Aug 6, 2017 at Tim Duy's Fed Watch
Even though the Federal Reserve is poised to start shrinking its $4.5 trillion balance sheet, the outlook for continued rate increases is very much in doubt following the recent slowdown in inflation. That makes the monthly jobs report on Friday even more important than usual as investors and analysts try to figure out whether the central bank will continue to take its cues from labor market strength rather than inflation weakness as it charts a course for monetary policy. Continued at Bloomberg Prophets.... Continue reading
Posted Aug 3, 2017 at Tim Duy's Fed Watch
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The Federal Reserve completed its July meeting with statement that pretty much everyone anticipated in advance. Interest rates were left unchanged and the Fed opened the door to begin balance sheet reduction "relatively soon." That means September. There was no reason to believe that the Fed does not still expect a third rate hike for this year which, if it comes, will be in December. That hike is of course data dependent. A couple of quick notes. Regarding balance sheet reduction, I think this via Bloomberg is correct: “September is the most likely outcome” for the launch of the balance-sheet... Continue reading
Posted Jul 27, 2017 at Tim Duy's Fed Watch
The path laid out by the Federal Reserve at the beginning of the year for three interest-rate increases plus the start of reducing its $4.5 trillion balance sheet looks shaky due to the slowdown in inflation. There’s no question that the Fed is nervous about the persistent inflation shortfall. Chair Janet Yellen made note of the issue during her congressional testimony earlier this month. Continued at Bloomberg Prophets... Continue reading
Posted Jul 25, 2017 at Tim Duy's Fed Watch
The Fed is growing increasingly concerned that this expansion will end like the last two, with a collapse in asset prices that brings down the economy. That concern will lead the central bank down the path of excessive tightening. Worse, that logic misses a key point. In both of the last two cycles, there was a sizable imbalance in the economy that extended beyond financial assets themselves. So far, the current environment lacks such an imbalance. That suggests the expansion ends with more of a fizzle than a bang. Continued at Bloomberg Prophets... Continue reading
Posted Jul 18, 2017 at Tim Duy's Fed Watch
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A generally upbeat June 2017 employment report supports the Fed's case for additional monetary tightening, most likely in the form of balance sheet action in September followed up by a 25bp rate hike in December. Moreover, the solid pace of job growth will encourage the Fed to maintain 2018 policy projections as well. Although the unemployment rate ticked up, ongoing job growth at this pace will eventually push it back down. Weak wage growth continues to restrain the Fed from accelerating the pace of easing; the tepid pace of wage gains suggests the Fed's estimates of full employment remain too... Continue reading
Posted Jul 9, 2017 at Tim Duy's Fed Watch
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The BLS will release the June employment report tomorrow. Wall Street is looking for an NFP gain of 170k. That sounds about right to me: There may be an upside surprise if the May number was low due to new college graduates not yet on the payroll during the survey week. The Fed believes this pace of job growth would be consistent with further downward pressure on the unemployment rate, keeping them stuck between concerns they will overheat the economy by undershooting the natural rate of unemployment and that pesky low inflation number. With that in mind, Wall Street anticipates... Continue reading
Posted Jul 6, 2017 at Tim Duy's Fed Watch
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 Jun 22, 2017 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