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Tim Duy
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If you were looking for fireworks from today's FOMC statement, you were disappointed. Indeed, you need to work pretty hard to pull a story out of this statement. It provided little reason to believe that the Fed has shifted its view since December. A June rate hike remains the base case. The Fed's assessment of the current statement is arguably the best in years: Information received since the Federal Open Market Committee met in December suggests that economic activity has been expanding at a solid pace. Labor market conditions have improved further, with strong job gains and a lower unemployment... Continue reading
Posted 4 days ago at Tim Duy's Fed Watch
The FOMC will reveal the outcome of this week's meeting later today. I think Calculated Risk hits the high points - "patient" is in, "considerable time" is completely out. Beyond this, we will be looking for clues on how the Fed is interpreting the current economic environment. I suspect little change in the overall tenor of the statement as they will want to leave June open as an option. I reiterate my position: The Fed needs to see an acceleration in wage growth to be confident that inflation will return to trend if they intend to raise rates in June.... Continue reading
Posted 5 days ago at Tim Duy's Fed Watch
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Increasingly, the Federal Reserve stands in stark contrast with its global counterparts. While the ECB readys its own foray into quantitative easing, the Bank of England shifted to a more dovish internal position, the central bank of Denmark joined the Swiss in cutting rates, and the Bank of Canada unexpectedly cut rates 25bp this morning. The latter move I found somewhat unsurprising given the likely impact of oil prices on the Canadian economy. The rest of the world is diverging from US monetary policy. How long can the Fed continue to stand against this tide? Late last week, Reuters reported... Continue reading
Posted Jan 21, 2015 at Tim Duy's Fed Watch
I see Jon Hilsenrath at the Wall Street Journal seconds my take from this morning: Federal Reserve officials are on track to start raising short-term interest rates later this year, even though long-term rates are going in the other direction amid new investor worries about weak global growth, falling oil prices and slowing consumer price inflation. This is generally consistent with my view. The Fed is likely reacting more slowly than market participants. Hilsenrath adds something I forgot to mention: Central to their internal deliberations ahead of the March meeting is a debate about how low the jobless rate can... Continue reading
Posted Jan 19, 2015 at Tim Duy's Fed Watch
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As it stands now, we are heading into the next FOMC meeting with the growing expectation that the Fed will take a dovish turn. Is it not obvious that global economic turmoil, collapsing oil prices, weak inflation, and a stronger dollar are clearly pointing to rapidly rising downside risks to the US economy? For financial market participants, they answer is a clear "yes." Expectations of the first rate hike have been pushed out to the end of this year, seemingly in complete defiance of Fed plans for policy normalization. The Fed may get there as well and abandon their carefully... Continue reading
Posted Jan 18, 2015 at Tim Duy's Fed Watch
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The December employment report, with its surprising combination of solid job gains and decelerating wage growth, leaves Fed policy up the air. Headline nonfarm payrolls gained by 252k, while previous months were revised up a net 50k. Job growth continues to accelerate: Note the acceleration in aggregate hours worked: Such gains suggest the recent acceleration in GDP growth is real and likely to be sustained. From the household survey, we see that the unemployment rate continues to decline. Fed forecasts will once again soon be in jeopardy: In the context of indicators previously identified by Federal Reserve Chair Janet Yellen:... Continue reading
Posted Jan 9, 2015 at Tim Duy's Fed Watch
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At the moment, there are many different competing threads in the tapestry of monetary policy, with another thread entering the pattern with tomorrow's employment report. In short, the Fed is balancing clear evidence of accelerating US activity in the back half of 2014 against the implications of declining oil prices and a host of international weaknesses that are roiling financial markets. The reality of volatility in asset prices was on full display this week. The Fed desire to begin normalizing policy with a rate hike in the middle of this year certainly appears in jeopardy. They very much need continued... Continue reading
Posted Jan 8, 2015 at Tim Duy's Fed Watch
Is this our future, brought back from the past? A contact referenced the last hike cycle via the FOMC statements from 2003-04 (emphasis added): October 28, 2003: The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future. In these circumstances, the Committee... Continue reading
Posted Dec 22, 2014 at Tim Duy's Fed Watch
Last week I had six questions for Federal Reserve Chair Janet Yellen. Here is my attempt to piece together the answers from her post-FOMC press conference: Question 1: If you want to know what the Fed is thinking at this point, a journalist needs to push Yellen on the secular stagnation issue at next week's press conference. Does she or the committee agree with Fischer? And does she see any inconsistency with the SEP implied equilibrium Federal Funds rates and the current level of long bonds? Yellen, in answer to Peter Coke of Bloomberg Television: "(The Committee) are optimistic that... Continue reading
Posted Dec 21, 2014 at Tim Duy's Fed Watch
Running short on time today.... Today's FOMC statement was a reminder that in normal times the Federal Reserve moves slowly and methodically. Policymakers were apparently concerned that removal of "considerable time" by itself would prove to be disruptive. Instead, they opted to both remove it and retain it: Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds... Continue reading
Posted Dec 17, 2014 at Tim Duy's Fed Watch
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The string of solid US economic news continued with industrial production advancing 1.3% in November. Year-over-year growth (5.2%) is now comparable to the late-90's: Meanwhile, the international fallout from the oil price drop continues. Russia is a classic emerging market crisis story. The decline in energy prices reveals a currency mismatch between assets and liabilities. The decline in oil dries up the dollars needed to support those liabilities, so the value of the ruble is bid down as market participants scramble for dollars. One suspects that capital flight from Russia only aggravates the problem; those oligarchs are seeing their fortunes... Continue reading
Posted Dec 15, 2014 at Tim Duy's Fed Watch
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FOMC meeting this week. We all pretty much know the lay of the land. "Considerable time" is on the table, and whether it stays or goes is a close call. The existence of the press conference this week argues for the change over just waiting until January. Stupid reason, I know, but we are just playing the Fed's game here. No real reason not to wait until January other than to keep a March rate hike in play, but only a few policymakers are seriously looking at March anyway. Uncertainty regarding the financial market impact of the oil price drop... Continue reading
Posted Dec 14, 2014 at Tim Duy's Fed Watch
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Incoming data in the second half of this week continues to support the Federal Reserve's plans to begin normalizing policy in the middle of next year, with the removal of "considerable time" language next week a likely first step. Retail sales for November were unquestionably strong and reveal an acceleration in the pace of core sales: You were right if you dimssed the early earnings on the holiday shopping season as useless noise. Similarly, consumer confidence is pushing to pre-recession levels: And note this from Reuters: "Expected wage gains rose to their highest level since 2008, and consumers voiced the... Continue reading
Posted Dec 12, 2014 at Tim Duy's Fed Watch
Both Paul Krugman and Ryan Avent are pushing back on the Federal Reserve's apparent intent to raise rates in the middle of next year. Why is the Fed heading in this direction? Krugman offers this explanation: My guess — and it’s only that — is that they have, maybe without knowing it, been bludgeoned into submission by the constant attacks on easy money. Every day the financial press, many of the blogs, cable financial news, etc, are full of people warning that the Fed’s low-rate policy is distorting markets, building up inflationary pressure, endangering financials stability. Hard-money arguments, no matter... Continue reading
Posted Dec 10, 2014 at Tim Duy's Fed Watch
I have tended to think that there is a tendency to underestimate the potential for a more hawkish Fed. From last week: Dudley appears to be increasingly concerned that the evolution of financial conditions this year suggests the Fed needs to pursue a more aggressive policy stance or else risk a repeat of 04-07. If this concern is being felt more generally within the Fed, it clearly puts a more hawkish bias to the Fed's reaction function. And, in my opinion, I think the risk of a more hawkish Federal Reserve is under-appreciated. Few are expecting a hawkish Federal Reserve,... Continue reading
Posted Dec 8, 2014 at Tim Duy's Fed Watch
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The November employment report came in ahead of expectations, with a monthly nfp gain of 321k and 44k of upward revisions to previous months. Job gains were spread throughout the major sectors of the economy. The 2014 acceleration in job growth is clearly evident: The employment report in the context of indicators previously identified by Federal Reserve Chair Janet Yellen as important to watch: Measures of underemployment are generally moving in the right direction. To be sure, the labor force participation rate remains in a general downward trend, but on this point I think you have to accept that demographic... Continue reading
Posted Dec 5, 2014 at Tim Duy's Fed Watch
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Data in the first week of December has told a generally bullish story for the US economy. The week began with an upbeat number from the ISM manufacturing index with solid underlying data: While this was seemingly at odds with the Markit manufacturing index, I would say that both of these series (like consumer confidence) exhibit far too much variability to place too much weight on any one month of data. If I look at the ISM measure in context with other US manufacturing data, the overall view is one of steadily improving activity in the sector (note the estimated... Continue reading
Posted Dec 3, 2014 at Tim Duy's Fed Watch
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Sometimes I wonder if the Fed every actually looks at the data. This, from Ann Saphir and Jonathon Spicer at Reuters: With the U.S. economy humming along at its fastest clip in more than a decade, the Federal Reserve should be confident about its ability to weather a global slowdown and start lifting interest rates around the middle of next year. But then there is inflation. Interviews with Fed officials and those familiar with its thinking show the mood inside is more somber than the central bank's reassuring statements and evidence of robust economic health would suggest. The reason is... Continue reading
Posted Dec 1, 2014 at Tim Duy's Fed Watch
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I stood relieved when Federal Reserve policymakers recognized the tendency toward pessimism during this recovery when no such pessimism was warranted: Finally, a couple of members suggested including language in the statement indicating that recent foreign economic developments had increased uncertainty or had boosted downside risks to the U.S. economic outlook, but participants generally judged that such wording would suggest greater pessimism about the economic outlook than they thought appropriate. This stands in contrast to fairly consistent efforts to find the dark cloud in every silver lining. This, from the Wall Street Journal: Economic prospects are flagging across Europe, Japan... Continue reading
Posted Nov 30, 2014 at Tim Duy's Fed Watch
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Not enough time to do any of these topics justice, but some quick takeaways for the last two days. First, read today's speech by Federal Reserve President William Dudley in which he discusses the global implications of US monetary policy. Some keys points: 1. Still dismissing the recent drop in inflation expectations. Dudley says: In assessing inflation expectations, I currently put more weight on survey-based measures of inflation expectations as opposed to market-based measures. Survey-based measures have been generally stable, consistent with inflation expectations remaining well-anchored. However, market-based measures, such as those based on breakeven inflation derived from the difference... Continue reading
Posted Nov 13, 2014 at Tim Duy's Fed Watch
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The October employment report was another solid albeit not spectacular read on the labor market. Job growth remained above the 200k mark, extending the ever-so-slight acceleration over the past year: Upward revisions to the previous two months added another 31k jobs. The acceleration is a bit more evident in the year-over-year picture, albeit still modest: The unemployment rate fell to 5.8% while the labor force participation rate ticked up. The labor market picture in the context of indicators previously cited by Federal Reserve Chair Janet Yellen looks like this: Looks like steady, ongoing progress to meeting the Federal Reserve's goals... Continue reading
Posted Nov 7, 2014 at Tim Duy's Fed Watch
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I stumbled across this piece in The America Spectator in which the authors argue against the prospect of the Federal Reserve pursuing a "triple mandate" by adding inequality to the current mandate of price stability and maximum employment. They claim the current mandate itself is unworkable: ...Replace the Fed’s current dual mandate with a single mandate—keep the price system as honest and stable as possible. The dual mandate creates a contradictory tension that makes it practically impossible for the Fed to function effectively... ...The Fed currently finds itself unable to pursue that kind of price stability, because its unemployment mandate... Continue reading
Posted Nov 6, 2014 at Tim Duy's Fed Watch
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Minneapolis Federal Reserve President Narayana Kocherlakota released a statement regarding his dissenting vote at this week's FOMC meeting. He does not share his colleagues faith that inflation will return to target anytime soon: ...In my assessment, the medium-term outlook for inflation has shown no overall improvement since last December and, indeed, is arguably worse. Failing to act in response to this subdued inflation outlook increases the downside risk to the credibility of our 2 percent inflation target. Market-based measures of longer-term inflation expectations have fallen recently to unusually low levels, a decline that I believe reflects that kind of increased... Continue reading
Posted Oct 31, 2014 at Tim Duy's Fed Watch
In broad terms, the FOMC meeting concluded as I had expected. To the extent there were any surprises, they were on the hawkish side. Or, I would say, hawkish mostly if you believed the events of the last few weeks justified a radical revision of the Fed's anticipated policy path. I didn't, but was too busy those same past few weeks to scream into the wind. As I anticipated, the Fed dismissed the decline in market-based inflation expectations. They clearly believe financial markets over-reacted to the decline in oil prices, and that that decline would ultimately prove to be a... Continue reading
Posted Oct 29, 2014 at Tim Duy's Fed Watch
I have been buried the past few weeks. So blogging has been, and will be, at least for a little longer, light. That said, I have trouble letting an FOMC meeting pass without at least few words before and after - even if there already exist broad agreement on the outcome. The general expectation is that the Fed ends its bond buying program at the conclusion of the meeting tomorrow. That alone promises to knock down the FOMC statement to a more manageable size. While St. Louis Federal Reserve President James Bullard offered up the possibility of retaining the program... Continue reading
Posted Oct 28, 2014 at Tim Duy's Fed Watch