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Tim Duy
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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 4 days ago 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
When it comes to the meetings of the Federal Open Market Committee, not all central bank policy makers are created equally. There are “participants” -- all the policy makers in the room -- and there are “members,” those who have a vote. It is important to keep this distinction in mind when reading the minutes of the FOMC meetings -- especially because many of the more hawkish members of the Fed are participants, not members. Continued at Bloomberg Prophets... Continue reading
Posted Feb 23, 2017 at Tim Duy's Fed Watch
The U.S. economy is poised to deliver on the Federal Reserve’s economic forecast for this year. That means a baseline outlook for three interest-rate increases remains in play -- though not the way market may be anticipating. Think of it as two rate hikes, one each in June and December, with an option for a third in September. Continued at Bloomberg Prophets.... Continue reading
Posted Feb 21, 2017 at Tim Duy's Fed Watch
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Federal Reserve Governor Stanley Fischer gave a very nice speech this weekend that shed light on the current monetary policymaking process. I found three points particularly notable. First: One important but underappreciated aspect of the SEP is that its projections are based on each individual's assessment of appropriate monetary policy. Each FOMC participant writes down what he or she regards as the appropriate path for policy. They do not write down what they expect the Committee to do. Yet the public often misinterprets the interest rate paths we write down as a projection of the Committee's policy path or a... Continue reading
Posted Feb 13, 2017 at Tim Duy's Fed Watch
The countdown to the Federal Reserve's next policy meeting in mid-March has begun, and so have the pleadings of some central bank officials desperately trying to suggest the meeting is “live.” Market participants remain wary -- and rightfully so -- that the Fed might pull the trigger on another interest-rate increase before June. Continued at Bloomberg Prophets... Continue reading
Posted Feb 13, 2017 at Tim Duy's Fed Watch
Having tipped their toes in the water with two interest-rate hikes -- and more expected to come -- the Federal Reserve officials have begun the discussion about reducing the size of the central bank’s $4.45 trillion balance sheet. To date, they have tended to look at interest rate-policy as separate from balance-sheet policy. Once the former is heading toward normalization, then they can begin the latter... Continued at Bloomberg Prophets... Continue reading
Posted Feb 10, 2017 at Tim Duy's Fed Watch
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The FOMC meeting came and went with little fanfare this week. As expected, there was no policy change, with only small modifications to post-meeting statement. With only small changes, it is a struggle to read much into the statement. Some thoughts: Business investment. The Fed drew attention to weak business investment. The recent gains in core capital goods orders and improving ISM manufacturing numbers could be pointing to an upturn in the months ahead, possibly enough to boost growth estimates. Keep an eye on this space. Business/Consumer Confidence. The Fed cited the post-Trump improvement in confidence. These gains, however, could... Continue reading
Posted Feb 2, 2017 at Tim Duy's Fed Watch
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Former Federal Reserve Governor Kevin Warsh’s column in Tuesday’s Wall Street Journal was so riddled with errors and misperceptions that it is hard to believe he was actually a governor. Warsh wants the Fed to announce a “practicable long-term strategy and stick to it,” claiming they have offered many such plans but never stuck to them. I don’t agree. The Fed has a plan, but Warsh just refuses to see it. The former governor’s first critique: A year ago around this time, the U.S. stock market fell about 10%. The Fed reacted precipitously, reversing its announced plan for 2016 of... Continue reading
Posted Jan 31, 2017 at Tim Duy's Fed Watch
The Federal Reserve is laying the groundwork for shrinking its $4.45 trillion balance sheet. But don’t panic yet, bond traders. This isn’t 2013. Continued at Bloomberg Prophets... Continue reading
Posted Jan 30, 2017 at Tim Duy's Fed Watch
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The Fed will take a pass at this week’s FOMC meeting. The median policy participant forecasts just three 25bp rate hikes this year and incoming data offers no surprises to force one of those this month. March, however, remains in play. The three forecasted rate hikes is not a promise. It could be one hike or could be four or more. The actual outcome will depend on the path of actual economic outcomes and what those outcomes imply for the forecast. The Fed is aware that crosscurrents in the economy – such as potentially significant changes to fiscal and economic... Continue reading
Posted Jan 29, 2017 at Tim Duy's Fed Watch
Federal Reserve Chair Janet Yellen made it clear in a recent speech that monetary policy wouldn't immediately be affected by the changing of the guard in Washington. It isn't the short-term that’s worth worrying about, but the long-term and the potential for new Fed governors to be neither objective nor divorced from political pressures... Continues at Bloomberg Prophets... Continue reading
Posted Jan 24, 2017 at Tim Duy's Fed Watch
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In my last post, I asserted: The actual amount of tightening will ultimately depend on the evolution of the forecasts for unemployment and inflation. If the expectation for unemployment drifts lower for this year, for instance, the median dots are likely to shift higher to ensure that the Fed continues to meet its mandate. Can we quantify the impact of a changing economic forecast on the projected amount of tightening this year? Yes, using the methodology of Federal Reserve Bank of San Francisco economists Fernanda Nechio and Glenn Rudebusch. In a recent article, they argue the change in the Federal... Continue reading
Posted Jan 24, 2017 at Tim Duy's Fed Watch
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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