FOMC Watch

Vice Chair Stan Fisher on “Committee & Rules” based decisions

In conclusion: My take is that rules are extremely useful reference tools, but they are likely to work best as inputs into a committee decision. Why? Let me reiterate some points I made in Warwick. First, the economy is very complex, and models that attempt to approximate that complexity can sometimes let us down. A particular difficulty is that expectations of the future play a critical role in determining how the economy reacts to a policy change. Moreover, the economy changes over time-‑this means that policymakers need to be able to adapt their models promptly and accurately in real time.… Read More

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Fed “Fed up with foot-dragging”

The second half of the month of February was notable for Fed “consistency” (note: nv=non-voting member) 14-Feb Janet Yellen: “Further adjustment likely needed if economy on track”. 14-Feb J. Lacker (nv): “Next hike should come sooner rather than later”. 15-Feb E. Rosengren (nv): “2017 growth could require faster rate hikes”. 15-Feb N. Kashkari: “Have to wait and see on new fiscal policies”. 22-Feb D. Lockhart (nv): “March is a live meeting”. 24-Feb J. Powell: “March hike is on the table”. 27-Feb R. Kaplan: “Should move sooner rather than later”. 28-Feb P. Harker: “3 hikes are appropriate this year”. 28-Feb J.… Read More

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Brainard not going to allow an economy to run hot, shame

As Market Monetarists, we think the Fed should be guided by the market’s view of nominal growth expectations. Unfortunately, there is no market in nominal growth expectations. We devised a market-influenced forecast for NGDP growth 12 months into the future as a sort of proxy for the market price. It has been rising steadily since the last few quarters have seen healthy QoQ NGDP growth and the market rallies after Trump’s victory at the polls. Our latest reading, for YoY growth in the first quarter of 2018, stood at 4.1%, and is likely to have increased since. Are markets screaming… Read More

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Now Dudley: We have seen a “very large” rise in household and business confidence and “very buoyant” financial markets since the election, “and we have the expectation that fiscal policy will probably move in a more stimulative direction,” he said on CNN. “The case for monetary policy tightening has become a lot more compelling,” added Dudley, a permanent voter on Fed policy and a close ally of Fed chair Janet Yellen. Bottom Line: “We shall overcome neutralize”

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Words matter

Kaplan joins Harker and Williams: Kaplan repeated his view that he would prefer the Fed to move “sooner rather than later,” but without explicitly calling for a rate increase next month. “We want to guard against a situation where we get behind the curve” on inflation, he said. Helped by Kaplan´s words, now the markets are pricing in a probability of 52 percent, up from less than 40 percent last week. That´s not surprising. With so many utterings of “sooner rather than later” and “upcoming”, the odds of a rate hike in the upcoming meeting naturally increases. However, that´s just a… Read More

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The Minutes

Minutes Given recent manifestations, like Yellen´s Congressional Testimony last week, maybe the markets expected some confirmation about the Fed´s rate timetable. Markets were disappointed on that regard. Yields and the dollar moved down. So, somewhat surprisingly, did stocks. Interestingly, four years ago exactly, Yellen was worried about “The painfully slow recovery”. We can now see much more clearly that there has been absolutely no recovery. The economy has just “crawled” along a low growth path. Back then, Yellen complained that fiscal policy was a “headwind”: Discretionary fiscal policy hasn’t been much of a tailwind during this recovery. In the year… Read More

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In “Looking back, looking ahead” Williams concludes: Although it has been a long, hard road back from the recession, the American economy is in good shape and headed in the right direction. We’ve reached our employment goal, and inflation is well within sight of and on track to reach our target. Given the progress we have made and signs of continued solid momentum in the economy, and consistent with our agreed-upon monetary policy approach, it makes sense for the Fed to gradually move interest rates toward more normal levels. The only explanation for these views, is that they derive from… Read More

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Harker today on the economy: Labor market Things are looking pretty good. Inflation Moving on to inflation, we’re seeing positive upward movement, although PCE remains below our 2 percent target. Headline and core PCE closed out last year at 1.6 and 1.7 percent, respectively. That’s a world of improvement over the end of 2015, when they were at 0.6 and 1.4 percent. We do have January numbers for CPI inflation, with headline CPI rising a remarkable 0.6 percent, driven largely by an increase in gas prices. That brings the year-over-year change to 2.5 percent. Core CPI rose 0.3 percent, bringing… Read More

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This from today´s Congressional Testimony: Incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the Committee’s expectations. At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate. This from the February 1st Statement: The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain,… Read More

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Statements from the FOMC have been eclipsed of late by more eagerly received comments on the US from Trump and Mnuchin. Last night Patrick Harker, a voter on the FOMC from the Philadelphia Fed, commented to journalists that he thought a March rate rise was on the table. Although we already know him as a hawk, he did manage to move markets. The CME FedWatch tool likelihood of no March rate rise shifted down from 91% to 86%, reflected also in the 2yr bond yield reversing earlier weakness. The USD also began a modest tear upwards. Not a lot, but not bad either… Read More

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