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Tim Duy
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The March FOMC minutes were generally interpretted as having a dovish tenor, contrasting with the generally hawkish reception for the statement and ensuing press conference. Overall, the Fed appears committed to a long period of low interest rates and I continue to think this should be the baseline view. But actually policy seems to remain hawkish relative to the Fed's rhetoric. By its own admission, the Fed is missing badly on both its mandates. Why then the push to reduce accommodation by ending asset purchases and laying the groundwork for the first rate hike? This leaves me wary the Fed... Continue reading
Posted Apr 10, 2014 at Tim Duy's Fed Watch
The March employment report came in pretty much in line with expectations. Nonfarm payrolls gained by 192k, and January and February were both revised higher. If you can discern any meaningful change in the underlying pace of economic activity from the nonfarm payrolls numbers, you have sharper eyes than me: You could almost draw that twelve month trend with a ruler. The unemployment rate moved sideways: In the past, sharp declines in the unemployment rate have been followed by periods of relative stability. I suspect we are currently in one such period. The internals of the household report were generally... Continue reading
Posted Apr 4, 2014 at Tim Duy's Fed Watch
Sorry for the light blogging this week - just getting back into the swings of things during the first week of spring term. But nothing like an employment report to pull me out of hibernation. It is no secret that the employment report has a significant impact on monetary policy. And we need to make increasingly deeper dives at the data to discern the implications for policy. Federal Reserve Chair Janet Yellen made that clear in her speech this week when she outlined a number of indicators - part-time but want full-time, wages,long-term unemployment, and labor force participation - as... Continue reading
Posted Apr 3, 2014 at Tim Duy's Fed Watch
Earlier today I said: Fourth, the dots undeniably moved forward and steeper, which means individual outlooks on the definitions of "considerable period" or "accommodative" did in fact change in meaningful ways. I am surprised, however, that this was not anticipated by market participants given the rapid decline in the unemployment rate. Along any given Fed objective function, one would expect that a more rapid decrease in unemployment would move forward and steepen the interest rate trajectory, even if just by 25 or 50pb. The Washington Post's Ylan Mui had a sitdown with Federal Reserve President John WIlliams: Logically, given that... Continue reading
Posted Mar 24, 2014 at Tim Duy's Fed Watch
Both. I see the source of your confusion. The "aggressive action" above was referred to the hypothesis that financial stability concerns caused them to exit asset purchases, not rewrite the Evans rule, and signal rate hikes. Prevents them from taking more "aggressive action" from a dovish side. And it could induce them to hike rates sooner. Which is more aggressive from a "hawkish side." So I see the confusion.
Toggle Commented Mar 24, 2014 on Kocherlakota's Dissent at Tim Duy's Fed Watch
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Some thoughts on post-FOMC activity as we head into Monday. First, I did not cover Federal Reserve Chair Janet Yellen's definition of a "considerable period" as six months in my review of the FOMC statement. I did not highlight the issue because when I went back to the tape, it looked clear to me that the bulk of the bond market response came at the release of the statement and projections. To be sure, the equity market stumbled, but here I completely agree with Felix Salmon: But here’s the thing: the market didn’t freak out....last Thursday, for instance, the yield... Continue reading
Posted Mar 23, 2014 at Tim Duy's Fed Watch
Minneapolis Federal Reserve President Narayana Kocherlakota defended his dissent at the March FOMC meeting. I thought it was quite remarkable. The reason of the dissent itself is not particularly unexpected: I dissented from the new guidance for two reasons. The first reason is that the new guidance weakens the credibility of the Committee’s commitment to target 2 percent inflation. The second reason is that the new guidance fosters policy uncertainty and thereby suppresses economic activity. I have already discussed the implications of dropping the Evans rule in regards to inflation. It implies an intention to approach the inflation target from... Continue reading
Posted Mar 21, 2014 at Tim Duy's Fed Watch
The outcome of the FOMC meeting was pretty much as I anticipated. Asset purchases were cut by $10 billion. The Evans rule was dumped. And forward guidance was enhanced to emphasize that rates would be low for a long, long time. All seems pretty much in-line with the general consensus. Yet financial market participants took a hawkish view of the news. Bonds were trounced - the 5 year Treasury yield lept almost 15bp. Market participants clearly saw something they didn't like. This despite what was a reasonably dovish inaugural press conference by Federal Reserve Chair Janet Yellen. Indeed, she strongly... Continue reading
Posted Mar 19, 2014 at Tim Duy's Fed Watch
I was re-reading some of the recent overshooting debate and it occurred to me that it is comical that we are even having this discussion. The Fed is not going to deliberately overshoot inflation, period. That train left the station long ago. So long ago that you can't even here the rumble on the tracks. The train left the station on January 25, 2012, with this statement by the Federal Reserve: The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over... Continue reading
Posted Mar 18, 2014 at Tim Duy's Fed Watch
The FOMC meeting begins today and ends tomorrow, followed by the traditional statement and Chair Janet Yellen's first press conference. The Fed will also update its forecasts - important because ultimately the forecast drives the policy decisions. I don't anticipate large changes to the growth or inflation forecasts. We should see modest downward revisions to the unemployment rate forecast. What will be more interesting is the impact those changes will have on the interest rate forecast. The bulk of the FOMC expects the first rate hike will be in the range of mid- to late-2015, with a handful earlier or... Continue reading
Posted Mar 18, 2014 at Tim Duy's Fed Watch
The issue of the degree of labor market slack in the US economy is now a hot topic. Joe Weisenthal and Matthew Bosler at Business insider have been pushing the debate forward, see here and here, for example. This is an important concern for monetary policy as the general consensus on the Fed is sufficient slack will continue to justify an extended period of low interest rates. Hence, rate hikes can be delayed until mid- to late-2015, or even 2016 as suggested by Chicago Federal Reserve President Charles Evans. There exists, however, considerable uncertainty about the amount of slack in... Continue reading
Posted Mar 11, 2014 at Tim Duy's Fed Watch
The employment report for February modestly beat expectations with a nonfarm payroll gain of 175k, leaving the recent trends pretty much intact: Did the labor market shake off the impact of a cold and snowy winter? No. Aggregate hours worked turned over during the winter, sending the year-over-year gains southward as well: Looks like the weather was less about hiring, and more about people not being able to get to their jobs. The unemployment rate edged up: I suspect we are seeing something like we saw in late 2011 when the unemployment rate fell sharply and then moved sideways for... Continue reading
Posted Mar 7, 2014 at Tim Duy's Fed Watch
I apologize if that was a misleading title. This post is not a grand, unifying theory of macroeconomics. It is instead a quick take on two posts floating around today. The first is Paul Krugman's admonishment to the Federal Reserve against raising interest rates before wages rise: So far, no clear sign that wage growth is accelerating. Even more important, however, wages are growing much more slowly now than they were before the crisis. There is no argument I can think of for not wanting wage growth to get at least back to pre-crisis levels before tightening. In fact, given... Continue reading
Posted Mar 6, 2014 at Tim Duy's Fed Watch
New York Federal Reserve President William Dudley had a sit down with the Wall Street Journal in which he provides some key insights into Fed thinking. First, regarding the tepid pace of data, it's the weather: Mr. Dudley said that he still expects, "the economy should do better" relative to last year, growing at around 3% this year. He said, however, it appears very likely that harsh weather slowed economic growth in the first quarter to under a 2% annual rate. See also this Wall Street Journal report on weak February retail sales. As expected, the Fed will dismiss soft... Continue reading
Posted Mar 6, 2014 at Tim Duy's Fed Watch
Incoming data has tended to disappoint. While weather impacts are taking part of the blame, I tend to think that part of the blame should fall on overly optimistic interpretations of data patterns at the end of 2013. In particular, the recently downwardly revised GDP numbers were less than spectacular abstracting away from inventory effects: Looking at real final sales, I see slow and steady, or even a modest softening, not magic acceleration. Similarly, aggregate hours worked never signaled a dramatic change in the pace of activity (unless, of course, one suspected productivty was exploding): Slow and steady is also... Continue reading
Posted Mar 5, 2014 at Tim Duy's Fed Watch
First off, sorry for the limited blogging of recent weeks. In the weeds at the office and the time to complete my winter to-do list before spring break is growing short. With the end of asset purchases in sight (and assuming activity does not lurch downward) Fed officials will increasingly turn the discussion toward raising interest rates. It is not as if the anticipated time line has been any secret. The Fed's forecasts clearly show an expectation of higher rates in 2015 with the exact timing and pace of that tightening dependent upon each participant's growth and inflation forecast. Fed... Continue reading
Posted Mar 3, 2014 at Tim Duy's Fed Watch
Federal Reserve Governor Daniel Tarullo tackled the issue of financial stability in a speech that I think is well worth the time to read. The starting point is that many lessons have been learned over the past two cycles, including the perils of ignoring financial stability issues. But how should such concerns be incorporated into the policymaking process? Tarullo: While few today would take the pre-crisis view common among central bankers that financial stability should not be an explicit concern of monetary policy, there is considerable disagreement over--among other things--the weight that financial stability concerns should carry compared with traditional... Continue reading
Posted Feb 25, 2014 at Tim Duy's Fed Watch
Labor Department Weighs Cutting Data on Import and Export Prices to Save Money - Real Time Economics The Great Recession! It's Right Behind You! - Free Exchange Federal Reserve Appoints Portland Business Leader Charles Wilhoite to Western Economic Advisory Council - Oregonian A Model of the Safe Asset Mechanism (SAM): Safety Traps and Economic Policy - NBER What is the Stance of Monetary Policy - macroblog Fracking Boom Leaves Texans Under a Toxic Cloud - Bloomberg Dallas Fed's Fisher Wants to Continue Reducing Bond Purchases - Real Time Economics You Won't Have Broadband Competition Without Regulation - Felix Salmon Has... Continue reading
Posted Feb 24, 2014 at Tim Duy's Fed Watch
Toggle Commented Feb 12, 2014 on Yellen's Debut as Chair at Tim Duy's Fed Watch
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Janet Yellen made her first public comments as Federal Reserve Chair in a grueling, nearly day-long, testimony to the House Financial Services Committee. Her testimony made clear that we should expect a high degree of policy continuity. Indeed, she said so explicitly. The taper is still on, but so too is the expectation of near-zero interest rates into 2015. Data will need to get a lot more interesting in one direction or the other for the Fed to alter from its current path. In here testimony, Yellen highlighted recent improvement in the economy, but then turned her attention to ongoing... Continue reading
Posted Feb 11, 2014 at Tim Duy's Fed Watch
Tomorrow brings the January 2014 employment report. The usual caveats apply: The monthly change in payrolls is a net number and represents only a fraction of the churn in the labor market. The employment data is heavily revised. The preliminary number can greatly understate or overstate actual labor market behavior. Nasty weather might also have impacted the numbers. Robin Harding at the Financial Times identifies other factors - expiration of unemployment benefits and annual revisions - that can also scramble the final numbers in the report. Forecasting the change in payrolls is thus something of a fool's game. A game... Continue reading
Posted Feb 6, 2014 at Tim Duy's Fed Watch
Yesterday I said: Altogether, the desire to end asset purchases suggests to me that what we have seen so far is insufficient to prompt the Fed to change their plans. That is especially the case if the data does not soften further - if, for example, the next employment report shows a rebound in payroll growth and a further decline in the unemployment rate. Today we learn via Bloomberg: “The hurdle ought to remain pretty high for pausing in tapering,” Richmond Fed President Jeffrey Lacker said after a speech today in Winchester, Virginia. Chicago’s Charles Evans said in Detroit that... Continue reading
Posted Feb 4, 2014 at Tim Duy's Fed Watch
The financial markets are not being kind to freshly minted Federal Reserve Chair Janet Yellen. The level of scrutiny she will face when she makes what is likely to be her first public appearance as Chair next week was already high, and is rising by the minute. Global markets are faltering, and US equity markets tumbled Monday, with the weak ISM numbers reported to be the proximate cause of the sell-off: The decline was driven by what can only be described as a jaw-dropping decline in the new order component: Weather is suspected in the decline, and the ISM report... Continue reading
Posted Feb 3, 2014 at Tim Duy's Fed Watch
The FOMC meeting came and went with the expected result - the tapering process continued on schedule, undeterred by the current emerging market turmoil. Of course, the Fed doesn't want to be seen as reacting to every gyration financial markets. But even more importantly, the Fed wants out of the asset purchase business on the belief that a.) tapering is not tightening and b.) even if it was tightening, they could compensate via forward guidance. The global stumble, however, is challenging that thinking. Regardless of financial markets or US data, the Fed was not likely to launch into a new... Continue reading
Posted Jan 29, 2014 at Tim Duy's Fed Watch
Plenty of data and Fedspeak to chew on last week, the sum total of which I think point in the same general direction. Economic activity is on average improving modestly, the Federal Reserve will push through with another round of tapering next week, and low inflation continues to hold back the threat of rate hikes. After stripping out the auto component, retail sales were solid in December: I think we are at or nearing the point where auto sales will generally move sideways and thus induce some additional volatility in the headline number. Consequently, it will be increasingly important to... Continue reading
Posted Jan 20, 2014 at Tim Duy's Fed Watch