The “eager beavers” at the FOMC must be disappointed

I gather this is true from comments by Bill McBride (Calculated Risk). For the last several months, his conclusion was always that “…this was a “solid” report”. Today´s report was just “decent”!

In fact, given that this was the 6th year of recovery employment report, it was dismal! One pointer, if the participation rate had not dropped 0.2 points the unemployment rate, instead of falling to 5.3%, would have climbed to 5.7%.

No mystery that despite the “low” unemployment rate, wages stayed put, and remained at their 2% line year over year. Given that the “eager beavers” are watching wage growth with “hawk-eyes”, they must feel “depressed”!

In his preview of the Employment Report yesterday, Tim Duy concluded:

Bottom Line: Incoming data continues to support the case that the underlying pace of activity is holding, alleviating concerns that kept the Fed on the sidelines in the first half of this year. I anticipate the employment report, or, more accurately, the sum of the next three reports, to say the same. Accelerating wage growth could very well be the trigger for a September rate hike, while Greece could push any rate hike beyond 2015. I myself, however, tend to be optimistic the Greece situation will not spiral out of control.

Seems he´s optimistic about everything, forgetting someone took out the “firing pin”. Shortly he´ll be talking December 15…March 16…

It was mind-boggling to hear this conclusion in Ed Lazear´s (a former CEA president) interview about the jobs report:

Interviewer: The numbers we have do not correlate with the zero interest rate policy. If you were at the Fed…

Ed: The numbers don’t give reason to raise interest rates but there´s no reason to keep rates low because that´s not helping the economy very much.


The Fed and the “Asymptotic Approach Principle”

The “principle” is well illustrated in Tim Duy´s Fed Watch:

September 2014

Bottom Line:  The baseline path for interest rates is a delayed and gradual rate hike scenario beginning mid-2015.  It seems reasonable, however, to believe that the risk is that this baseline is too dovish given the general progress toward the Fed’s goals, a point made repeatedly by Fed hawks. Internal dissension to the baseline would only intensify in the face of another six months of generally solid economic news, especially on the labor front.  Yellen would not want to risk the recovery, however, on an overly aggressive approach, especially in the face of low inflation. Considering the path of the data relative to the various policy factions with the Fed, I believe the risk is that the Fed pulls forward the date of the first rate hike as early as March – still seven months away! – while maintaining expectations for a gradual subsequent rate path.

January 2015:

If you were looking for fireworks from today’s FOMC statement, you were disappointed. Indeed, you need to work pretty hard to pull a story out of this statement. It provided little reason to believe that the Fed has shifted its view since December. A June rate hike remains the base case.

June 2015

The Federal Open Market Committee meets this week to discuss the path of monetary policy.

Any possibility of a rate hike at the meeting’s conclusion on Wednesday was already crushed under the weight of weak data early in the year. To be sure, the data support the transitory nature of the weakness, justifying Federal Reserve Chair Janet Yellen’s optimism last month, but it remains too little, too late. Instead, turn to September as the next opportunity for the first rate hike of this cycle

In a couple of months, “Tim-In” for December…

“The Great Excuse”

For the past five years the economy has been depressingly boring. But we have to understand that FOMC members must feel that by keeping interest rates at “zero” for more than 6 years, they have not been doing any “work”. As such they are restless and “trigger happy”.

Some pointers:

US Federal Reserve Chair Janet Yellen’s premium on consensus may lead to a Fed decision she has not yet endorsed, as a near-majority aligns in favor of a possible June interest rate hike.

Seven of the Fed’s 17 members have now said that they at least want the option of a June tightening on the table, or have pushed in general for an earlier increase amid an expectation that wages and inflation would turn higher.

By contrast, there is a dwindling core of officials who say publicly that the US economy and labor markets in particular still have a long way to go — just four Fed members have in recent weeks clearly said that rate hikes would not be appropriate until much later in the year or even into next year.

The five members of the Fed’s Washington-based board of governors, including Yellen, have spoken less definitively, although governors including Jerome Powell have said that they expected strong job growth to continue. Not all of the seven who point to June vote this year on the Fed’s 10-member policy setting committee, but all participate in policy discussions.

Tim Duy´s “Bottom Line:

“Patient” is out. Tough to justify with unemployment at the top of the Fed’s central estimates of NAIRU. Pressure to begin hiking rates will intensify as unemployment heads lower. The inflation bar will fall, and Fed officials will increasingly look for reasons to hike rates rather than reasons to delay. They may not want to admit it, but I suspect one of those reasons will be fear of financial instability in the absence of tighter policy. June is in play.

And this is what they have faced ever since the economy came out of the throes of the “Great Recession” five years ago:

Great Excuse

What´s behaving “differently”? Clearly the unemployment rate, so that becomes the “compass”. It suits Yellen, a devotee of the Phillips Curve and its NAIRU variant!