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Tim Duy
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Just when you think it's safe to jump in the water, reality strikes. While I still think that the Fed passes in March, the solid jobs report is just what is takes to keep the Fed in the game. Back it up with another such report in March (February number released on March 4) and a stronger inflation signal in one of the upcoming price reports and you set the stage for a divisive battle at the next FOMC meeting. Nonfarm payrolls grew by 151k, below consensus but within a reasonable range of estimates. The twelve-month moving average reveals a... Continue reading
Posted 6 days ago at Tim Duy's Fed Watch
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The jobs report for January is upon us. I would like to say this one will receive special attention but they all receive special attention. Consensus forecast is for nonfarm payrolls to gain 188k, with a range of 170k-215k, while unemployment holds constant at 5%. Calculated Risk looks at five indicators and concludes: Unfortunately none of the indicators above is very good at predicting the initial BLS employment report. However, based on these indicators, it appears job gains will be below consensus. One of the indicators CR considers in consumer sentiment, which as CR says is influenced by factors other... Continue reading
Posted Feb 3, 2016 at Tim Duy's Fed Watch
Monday Federal Reserve Vice Chair Stanley Fischer offered up a speech and lengthy discussion on recent monetary policy. It was both illuminating and frustrating at once. Although his confidence is fading, I also sense that he is resisting change. Fischer begins by reviewing the December decision: Our decision in December was based on the substantial improvement in the labor market and the Committee's confidence that inflation would return to our 2 percent goal over the medium term. Employment growth last year averaged a solid 220,000 per month, and the unemployment rate declined from 5.6 percent to 5.0 percent over the... Continue reading
Posted Feb 2, 2016 at Tim Duy's Fed Watch
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The FOMC held steady today, as expected. The reaffirmed their basic forecast, but gave a nod to current global economic and financial economic uncertainty. That is all that should have been expected. Still, there is a deeper story. Puzzle over the opening paragraph for a moment (thanks to the WSJ FOMC Statement Tracker): I feel like I will soon be going down the hall and grabbing an English professor to help me translate these statements. I hate to do this sort of thing, but notice that they brought the labor market forward and pushed the overall economy back? I think... Continue reading
Posted Jan 27, 2016 at Tim Duy's Fed Watch
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Gavyn Davies writes: It is true that much of the weakness in the nowcast is identified by economic variables that relate to the industrial sector. But these variables have, in the past, been very closely correlated with activity in the economy as a whole, and are therefore usually among the best indicators of overall activity. It is dangerous to ignore weakness in these industrial variables that persists for a long period, which is what is happening now....The full model, including the industrial sector data, estimates that the recession probability has been hovering around 15-20 per cent (above right graph), no... Continue reading
Posted Jan 26, 2016 at Tim Duy's Fed Watch
Federal Reserve policymakers are likely enjoying this month about as much as market participants are. Central bankers at the Fed don’t like fast-moving markets to begin with, and they especially won’t like the implication that their supposedly inconsequential 25-basis-point interest rate hike in December was a mistake. The only saving grace for the Fed is that January was off the table for a rate hike anyway, so the volatility on Wall Street will have little impact on this week’s policy outcome, due to be announced on Wednesday... Continue reading at Bloomberg Continue reading
Posted Jan 26, 2016 at Tim Duy's Fed Watch
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If I had to rely on only two leading indicators of recessions, they would be initial unemployment claims and the yield curve (next in line would be housing). I talked about initial claims in the context of employment data in my last post. This post is about the yield curve. An inversion of the yield curve has typically given a 12 month or better signal ahead of recessions: Note also that it is the inversion that is important. The yield curve was fairly flat in the late-90's, a period of supercharged growth in the US economy. So when the Financial... Continue reading
Posted Jan 14, 2016 at Tim Duy's Fed Watch
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The recession drumbeat grows louder. This is not unexpected. Most forecasters have an asymmetric loss function; the cost of being wrong by missing a recession exceeds the cost of being wrong on a recession call. Hence economists tend to over-predict recessions. Eight of the last four recessions or so the joke goes. And while I don't believe a recession is imminent, there are perfectly good reasons to be wary that a recession will bear down on the economy in the not-so-distant future. Historically, when the Fed begins a tightening cycle, the clock is ticking for the expansion. By that time,... Continue reading
Posted Jan 13, 2016 at Tim Duy's Fed Watch
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The minutes of the December FOMC meeting were released today. The minutes were considered to have a dovish tone, although I would be wary of thinking there is much new information to be found. Labor market conditions had improved sufficiently to justify a certain degree of confidence in the inflation outlook: Regarding the medium-term outlook, inflation was projected to increase gradually as energy prices and prices of non-energy imports stabilized and the labor market strengthened. Overall, taking into account economic developments and the outlook for economic activity and the labor market, the Committee was now reasonably confident in its expectation... Continue reading
Posted Jan 6, 2016 at Tim Duy's Fed Watch
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Federal Reserve officials remain confident as markets began 2016 on a tumultuous note. Cleveland Federal Reserve President Loretta Mester told Reuters that although she is "pretty comfortable with the median path" of roughly four rate hikes this year, she would prefers a somewhat more aggressive forecast. That is less hawkish than it might seem given that Mester has a more optimistic economic outlook: "Mester expects the U.S. economy to grow at a 2.5 percent to 2.75 percent pace this year, slightly stronger than the 2.4-percent rate median forecast of her colleagues. That optimism allows her to view more than four... Continue reading
Posted Jan 4, 2016 at Tim Duy's Fed Watch
Ha! Fixed.
Toggle Commented Jan 3, 2016 on A Look Ahead Into 2016 at Tim Duy's Fed Watch
1 reply
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What do I expect to see in 2016? Briefly, here are my baseline expectations for the year: 1.) No recession. I think that fears of recession in 2016 are overblown. Softness in the manufacturing sector is the primary motivation for such fears, but this ignores the declining economic importance of manufacturing in the US economy. Manufacturing now accounts for just 8.6% of jobs. I think people are falling into a trap of overemphasizing the importance of manufacturing as a cyclical indicator. A broader perspective indicates little reason to be worried of recession in 2016: Also note that initial unemployment claims,... Continue reading
Posted Jan 3, 2016 at Tim Duy's Fed Watch
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David Keohnae at FT Alphaville points us toward a JPM research note raising the prospect of a reappearance of Former Federal Reserve Chair Alan Greenspan’s “conundrum.” From the note: If long-term interest rates matter more than short-term interest rates, will Fed’s current and prospective rate hikes matter much? The answer is yes if long-term interest rates respond to these short-term rate hikes. But this transmission is far from given, especially given the Fed’s decision that reinvestments would not be halted until the normalization of the funds rate is “well under way” The previous hiking cycle of 2004-2006 is a reminder... Continue reading
Posted Dec 21, 2015 at Tim Duy's Fed Watch
Today, the FOMC voted to raise the target range on the federal funds rate by 25bp. The accompanying statement and the Summary of Economic Projections offered no surprises. That very lack of surprise should be counted as a "win" for the Fed's communication strategy. A little bit of extra direction since September went a long way. The statement again described the economic growth as "moderate." Although there is some external weakness, the domestic economy is solid, hence "the Committee sees the risks to the outlook for both economic activity and the labor market as balanced." The Fed continues to expect... Continue reading
Posted Dec 16, 2015 at Tim Duy's Fed Watch
The Federal Reserve is set to raise interest rates this week for the first time since 2006. The final days of the zero interest-rate policy known as ZIRP are upon us; the end is here. But the end of ZIRP is the beginning of a new chapter of monetary policy. This chapter will tell the story of the Federal Reserve’s efforts to normalize policy, and that particular tale has yet to be written. You can, however, expect Fed Chair Janet Yellen to emphasize “gradually” and “data dependent” as she pens the first few lines of the narrative at this week’s... Continue reading
Posted Dec 15, 2015 at Tim Duy's Fed Watch
Yes, that is what I meant. Corrected.
1 reply
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The Fed is poised to raise the target range on the federal funds rate this week. More on that decision tomorrow. My interest tonight is a pair of Wall Street Journal articles that together call into question the wisdom of the Fed's expected decision. The first is on inflation, or lack thereof, by Josh Zumbrun: Central bank officials predict inflation will approach their target in 2016. The trouble is they have made the same prediction for the past four years. If the Fed is again fooled, it may find it raised rates too soon, risking recession. A key reason for... Continue reading
Posted Dec 13, 2015 at Tim Duy's Fed Watch
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If you had any doubt about the outcome of next week's FOMC meeting, Friday's employment report set you straight. When I try to think about what could stay the Fed's hand at this point, I am down to zombie apocalypse or act of God. I am not betting on either. By next week, we will be wrapping up our coverage of ZIRP, quietly filing away everything we learned for the next recession. That we return to ZIRP in the future remains my long-run view. But that is a concern for a future date. The employment report was solid, with the... Continue reading
Posted Dec 6, 2015 at Tim Duy's Fed Watch
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The latest read on the Fed’s preferred inflation metric was not particularly kind to policymakers: Indeed, as Craig Torres at Bloomberg notes, this is only one of a number of indicators that should give a reality check to FOMC participants as December’s meeting approaches. A stronger dollar, weaker commodity prices, and falling inflation expectations suggest that the “transitory” negative weights on inflation might persist longer than the Fed anticipates. In addition, since I last wrote, real time estimates of fourth quarter GDP weakened in the face of incoming data. And manufacturing is data is off to a weak start this... Continue reading
Posted Nov 30, 2015 at Tim Duy's Fed Watch
Federal Reserve policymakers have pretty much taken all of the mystery out of this next meeting. Federal Reserve Vice Chair Stanley Fischer, via Reuters: "In the relatively near future probably some major central banks will begin gradually moving away from near-zero interest rates," Fed Vice Chairman Stanley Fischer told the San Francisco Fed's biannual Asia Economic Policy conference. "While we at the Fed continue to scrutinize incoming data, and no final decisions have been made, we have done everything we can to avoid surprising the markets and governments when we move, to the extent that several emerging market (and other)... Continue reading
Posted Nov 22, 2015 at Tim Duy's Fed Watch
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It would seem that a December rate hike is all but certain barring some dramatic deterioration in financial conditions. The October employment report should remove any residual concerns among FOMC members over the underlaying pace of activity, clearing the way for the Fed to make good on the strongly worded October FOMC statement. Given the resilience of recent trends, it is tough to see that even a weak-ish November employment report would dissuade the Fed from hiking rates. Quite frankly, regardless of whether you think they should hike rates, if they don't hike rates, the divergence between what they say... Continue reading
Posted Nov 8, 2015 at Tim Duy's Fed Watch
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I recently predicted the following: One of two things is going to happen. Either the US economy is or will soon be slowing on the back of already tighter financial conditions. Or the US economy will soon be slowing on the back of future tighter financial conditions as directed by the Federal Reserve. My baseline expectations for next year need more explanation, particularly in light of the weak third quarter GDP report and the early signals on fourth quarter growth via the Atlanta Fed’s GDPNow tracker (currently at the low-end of consensus). Three caveats, however, to keep in mind. First,... Continue reading
Posted Nov 4, 2015 at Tim Duy's Fed Watch
One of two things is going to happen. Either the US economy is or will soon be slowing on the back of already tighter financial conditions. Or the US economy will soon be slowing on the back of future tighter financial conditions as directed by the Federal Reserve. In a worst case scenario, both of these things will happen. And the odds of both of these things happening seems higher after this week's FOMC meeting. Rather than being a nonevent as expected, it was actually quite exciting. We learned that the majority of the FOMC remains wedded to the idea... Continue reading
Posted Oct 28, 2015 at Tim Duy's Fed Watch
What if a Federal Reserve Governor drops a policy bomb in the woods and no one is there to hear it? Did it really make a noise? That's what happened today. While the bond market was closed and whatever financial journalists were left focusing their efforts on newly-minted Nobel Prize recipient Angus Deaton, Federal Reserve Governor Lael Brainard dropped a policy bomb with her speech to the National Association of Business Economists. It was nothing short of a direct challenge to Chair Janet Yellen and Vice Chair Stanley Fischer. Is was, as they say, a BFD. That, at least, is... Continue reading
Posted Oct 12, 2015 at Tim Duy's Fed Watch
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Gavyn Davies reviews the evidence on the apparent slowing of US economic activity and concludes: So is the US slowdown for real? Yes, but it is not yet very severe — and some of it is the result of the temporary inventory correction, and some to the rising dollar. Unless it grows worse in the next few weeks, it is unlikely to dislodge the Fed from the path it has now firmly chosen. This I think is broadly consistent with views on the FOMC and explains why many policymakers insist that a rate hike this year remains likely. Vice Chair... Continue reading
Posted Oct 11, 2015 at Tim Duy's Fed Watch