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Tim Duy
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With global financial markets reeling in the wake of Brexit - Britain's unforced error as a political gamble went too far - the Fed is back on the sidelines. A July hike was already out of the question before Brexit, while September was never more than tenuous, depending on the data falling in place just right. Now September has moved from tenuous to "what are you thinking?" Indeed, the debate has shifted in the opposite direction as market participants weigh the possibility of a rate cut. The Fed is probably not there yet, but internally they are probably increasingly regretting... Continue reading
Posted yesterday at Tim Duy's Fed Watch
The best-laid plans can come undone by the tiniest of things. In this case a slip in the data—a low print on nonfarm payrolls that may prove no more than a statistical bump—put a June interest rate hike out of reach for the Federal Reserve and probably a July one as well. That leaves September in focus as the next chance for the U.S. central bank to tighten policy—if the data hold... Continued at Bloomberg.... Continue reading
Posted Jun 14, 2016 at Tim Duy's Fed Watch
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Federal Reserve Chair Janet Yellen has been vexed by an inflation problem. Now she is also vexed by an inflation expectations problem. Last week she said (emphasis added): Uncertainty concerning the outlook for inflation also reflects, in part, uncertainty about the behavior of those inflation expectations that are relevant to price setting. For two decades, inflation has been relatively stable, reacting less persistently than before to temporary factors like a recession or a swing in oil prices. The most convincing explanation for this stability, in my view, is that longer-term inflation expectations have remained quite stable. So it bears noting... Continue reading
Posted Jun 12, 2016 at Tim Duy's Fed Watch
Next week's meeting of the Federal Open Market Committee (FOMC) includes a press conference with Chair Janet Yellen. These are five questions I would ask if I had the opportunity to do so in light of recent events. 1. What's the deal with labor market conditions? You advocated for the creation of the Federal Reserve's Labor Market Conditions Index (LMCI) to serve as a broader measure of the labor market and as an alternative to a narrow measure such as the unemployment rate... Continues at Bloomberg.... Continue reading
Posted Jun 10, 2016 at Tim Duy's Fed Watch
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Lot's of Fed news over the past few days that add up to a simple takeaway: June is off the table (again), the stars have to align just right for a July rate hike (not likely), and September is coming into focus as the next possible rate hike opportunity. September, however, assumes that the employment report is more of an outlier than part of a trend. that's what the Fed will be taking out of the data in the coming months. Nonfarm payrolls grew by a disappointing 38K in May, low even after accounting for the Verizon strike. Downward revisions... Continue reading
Posted Jun 6, 2016 at Tim Duy's Fed Watch
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Last week Federal Reserve Chair Janet Yellen gave the green light for a rate hike this summer. Via the Wall Street Journal: “It’s appropriate…for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate,” she said during a panel discussion at the Radcliffe Institute for Advanced Study at Harvard University. This follows on the back numerous Fed speakers, as well as the minutes of the last meeting, that helped place June into play. Of course, Yellen's "coming months" could easily be beyond June, and I... Continue reading
Posted Jun 1, 2016 at Tim Duy's Fed Watch
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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 May 26, 2016 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 May 24, 2016 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 May 23, 2016 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
1 reply
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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