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Tim Duy
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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 7 days ago 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 7 days ago 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
Rent or buy? Often I am asked this question, and I find I lack a satisfactory answer. I realize that people who ask me this question are typically in transitional phases in their lives – moving from young adulthood to real adulthood. The answer is perhaps more obvious on either side of that inflection point, less so in the middle of it. From my experience, these are the pros and the cons: Pros. You earn the untaxed imputed rent (you pay yourself rent) and receive a tax deduction on your mortgage interest. Double subsidy. Assuming a fixed rate mortgage, you... Continue reading
Posted Nov 17, 2016 at Tim Duy's Fed Watch
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Some back of the envelope calculations: The Fed's long-run real GDP growth estimate - the rate of potential GDP growth - is 1.8%. According to Federal Reserve Vice Chair Stan Fischer last week: If labor force participation was to remain flat, job gains in the range of 125,000 to 175,000 would likely be needed to prevent unemployment from creeping up. However, if labor force participation was to decline, as might be expected given demographic trends, the neutral rate of payroll gains would be lower. If we assumed a downward trend in participation of about 0.3 percentage point per year, in... Continue reading
Posted Nov 14, 2016 at Tim Duy's Fed Watch
As expected, the Federal Reserve left policy unchanged this month. The statement itself was largely unchanged as well. The near term inflation outlook improved, going from this is in September: Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. To this in November: Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past... Continue reading
Posted Nov 2, 2016 at Tim Duy's Fed Watch
This from Bloomberg surprised me: Michael Gapen, chief U.S. economist at Barclays Plc in New York, said Fischer’s comments “reflect an ongoing divergence of opinion” at the central bank. Fischer “doesn’t see much room for running the economy hot” while Yellen’s views “seem to provide a wide-open door to do that. You have a chair and a vice chair who see policy differently right now,” he said. I don't think there exists a yawning gap between Federal Reserve Vice-Chair Fischer and Federal Reserve Vice Chair Yellen. The perception of this gap stems in part from what I think was an... Continue reading
Posted Oct 17, 2016 at Tim Duy's Fed Watch
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Federal Reserve hawks face an array of labor market data that threatens a key pillar holding up their policy view. That pillar is the assertion that monthly nonfarm payroll growth over roughly 100k will soon force unemployment far below the natural rate, thus placing the US economy in grave danger from inflationary forces. By this view, the decline of unemployment long ago justified further rate hikes. Hawks failed to anticipate that the unemployment rate would flatten out at 5 percent despite steady payrolls growth. This outcome does not fit in their worldview. Fundamentally, they were supply-side pessimists. The recent strength... Continue reading
Posted Oct 10, 2016 at Tim Duy's Fed Watch
If there is one thing that I am fairly sure that monetary policymakers hate, it is the idea that the outcomes of their meetings are preordained. November appears to be just such a meeting. To be sure, Fed hawks want to believe the meeting is "live." The sizable group that dissented - or would have dissented if they were voting members - likely sees the case for a rate hike in November as even more pressing than in September. Remember, it is all about preemptive policy action from that contingent. If you thought delay was bad in September, it must... Continue reading
Posted Oct 5, 2016 at Tim Duy's Fed Watch
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FOMC doves squeezed out another victory at last week’s meeting. But can they do it again in December? As was widely expected, the Fed held rates steady at the September FOMC meeting. That said, the meeting was clearly divisive, with three dissents, all from regional bank presidents. And the accompanying statement leaned in a hawkish direction – the committee noted that near-term risks were “balanced” and that the case for a rate hike had “strengthened.” Moreover, only three of the participants did not expect a rate hike before year end. And if that was not enough, during her press conference,... Continue reading
Posted Sep 26, 2016 at Tim Duy's Fed Watch
A roundup of Fed-related stories and viewpoints ahead of the FOMC meeting. First, Jeanna Smialek at Bloomberg sees danger lurking in the new dot plot: Janet Yellen will frame a decision this week to forgo an interest-rate increase as necessary to achieve the Federal Reserve’s economic goals. Donald Trump and his supporters are likely to frame it as political. That’s because the central bank on Wednesday will also release fresh “dot plot” projections which will probably show policy makers see one quarter-point rate hike by the end of the year. Such a forecast would be widely interpreted as a sign... Continue reading
Posted Sep 20, 2016 at Tim Duy's Fed Watch