Things have been bad, not improving and after today´s jobs report, the word “improving” cannot be detected even through magnification lenses! And this is what the number two honcho at the Fed - William Dudley – had to say two days ago:
“If the economy were to slow so that we were no longer making material progress toward full employment, the downside risks to growth were to increase sharply, or if deflation risks were to climb materially, then the benefits of further accommodation would increase in my estimation and this could tilt the balance toward additional easing.”
So let´s see what the economy´s “acceleration rate” (from which it could slow) has been like. The panel shows the behavior of important labor market/employment indicators. The deterioration is evident and there´s no indication of recovery. In that case, does Dudley mean that things will have to get even worse for the Fed to wake up? Or, since this is an election year, monetary policy enjoys a sabbatical?
The chart below indicates that employment generation is weakening. And that comes on the heels of an 8.7 million drop in employment between February 2008 and February 2010, compensated by a gain of just 3.7 million between March 2010 and May 2012!
Yes folks, looks like “mañana in America”!
So Dudley wants the Fed to enforce a 0% NGDP floor, i.e., no (deflation+recession).
I guess if the fed is targeting a 0% NGDP floor, and a 2% PCE ceiling, we are getting exactly what they want.
Steve – But they don´t come out and say so explicitly. They say: “we´ll act if things get worse”! Unfortunately, things are already horrible.
Yes, they don’t say so explicitly. But I interpret Dudley as saying “We are going to passively tighten until we hit our 0% NGDP target floor.”
I realize that’s probably not what Dudley intends, but the Fed is so incompetent and so afraid of criticism from bondholders, that the market forces the 0% NGDP issue.