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Prediction for March FOMC Meeting

ResponsiblyIrresponsible
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3/14/2016 5:55:37 PM
Posted: 8 months ago
The Fed meets next week, and Janet Yellen be giving a press conference.

Ironically, if only we had the recent data to look at, it's very likely that the Fed would raise rates at this meeting: core inflation year-over-year shot up in January to 1.7 percent (some, but very little, was probably mechanical, as a function of the so-called "base effect": i.e., the pass-through to core probably, primarily, took place during the largest decline in the level of oil prices), financial conditions seem to have stabilized to some effect (oil is back up, equities are back up, inflation expectations have rebounded somewhat, the dollar has tapered off some of its gains, etc.), and the ECB has conducted further easing -- which is, on balance, a bullish factor for the U.S. economy.

I opposed lifting off in December, but if I were on the Fed today, it's very possible that I would vote for a (first) rate increase at this meeting.

However, it's very clear that they won't be raising: the market-implied probability priced into fed fund futures for a rate hike is 0 percent, and it's clear that the Fed won't want to lean against the market -- and some of the more astute on the Fed will acknowledge this as a history-dependent assessment of downside risks, rather than a static forecast of the whims of Fed policymakers. (In other words, using fed funds futures as the rationale for holding steady is not falling victim to the "circularity" problem.)

Here's what they will do, because they wanted initially to lift four times this time -- and it's pretty clear they'll only raise at a meeting with press conference. After March -- which is too little, too late -- they'll only have three left. The implication, then, is that they would only be able to raise three times this year.

But I don't buy it. They want people to think that every meeting is live, and surely they haven't felt any need in the past to project only an amount of rate hikes less than or equal to the number of remaining press conferences. But there is a tendency among Fed policymakers to revise downward their forecasts through the year -- i.e., a September forecast for the funds rate is far more credible than a March forecast, primarily because there's only one, or at most two, more meetings with which to execute that policy.

So here's what will happen on Wednesday:

(a) The Fed will maintain the target range for the federal funds rate at 1/4 to 1/2 percent.

(b) They'll again get really bullish on the labor market: they want markets to react to positive data, and the labor reports are at the top of their list -- i.e., their goals are maximum sustainable EMPLOYMENT and 2 percent inflation, and they think one flows from the other via Phillips curve effects. The last jobs report was really good: 242k jobs created with 30k jobs from upward revisions over the past two months. The unemployment rate, at 4.9 percent, is at their median estimates of the natural rate -- so, within the framework of an accelerationist Phillips curve, they'd tend to think that would lead inflation to spike. But wages held steady at an anemic year-on-year growth rate (2.2), and many on the Fed are (rightly) skeptical of the Phillips curve.

Then again, their forecast for the unemployment rate this year, embedding their funds rate projections -- i.e., how low they're willing to let the unemployment rate go -- is 4.7 percent. Usually unemployment falls at a faster rate than the Fed projects and GDP/inflation grow slower, so that suggests at least (a) some skepticism in the Phillips curve model and (b) a belief that there's some -- not a lot, but some -- remaining slack in marginally attached and involuntary part-timers. So the labor market will likely impact the balance of risks, but not drive the overall rate decision.

(3) In January they struck the balance of risks from the statement: instead, they said they were reevaluating the balance of risks in light of global developments. Tim Duy seems to think they might revive this with an upward bias, but I highly doubt it. I think, if anything, the persistence in financial tightening and the headwinds from weak global growth is somewhat, but not even close to fully, offset by resilience in the labor market. But you might see them revive this with a "nearly balanced" risk calculus. More likely -- and this is my base case -- you'll see them say that "downward risks to the outlook for overall economic activity and inflation have diminished somewhat in recent weeks."

Basically, it'll be a "hawkish hold." They won't raise rates, but they'll signal, as they did in September, that another hike is well on its way and probably coming in June, barring catastrophe.

So, boring meeting, not much to see here. They want to tighten and they probably will again soon, but not yet.
~ResponsiblyIrresponsible

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walker_harris3
Posts: 273
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3/14/2016 7:37:16 PM
Posted: 8 months ago
At 3/14/2016 5:55:37 PM, ResponsiblyIrresponsible wrote:
The Fed meets next week, and Janet Yellen be giving a press conference.

Ironically, if only we had the recent data to look at, it's very likely that the Fed would raise rates at this meeting: core inflation year-over-year shot up in January to 1.7 percent (some, but very little, was probably mechanical, as a function of the so-called "base effect": i.e., the pass-through to core probably, primarily, took place during the largest decline in the level of oil prices), financial conditions seem to have stabilized to some effect (oil is back up, equities are back up, inflation expectations have rebounded somewhat, the dollar has tapered off some of its gains, etc.), and the ECB has conducted further easing -- which is, on balance, a bullish factor for the U.S. economy.

I opposed lifting off in December, but if I were on the Fed today, it's very possible that I would vote for a (first) rate increase at this meeting.

However, it's very clear that they won't be raising: the market-implied probability priced into fed fund futures for a rate hike is 0 percent, and it's clear that the Fed won't want to lean against the market -- and some of the more astute on the Fed will acknowledge this as a history-dependent assessment of downside risks, rather than a static forecast of the whims of Fed policymakers. (In other words, using fed funds futures as the rationale for holding steady is not falling victim to the "circularity" problem.)

Here's what they will do, because they wanted initially to lift four times this time -- and it's pretty clear they'll only raise at a meeting with press conference. After March -- which is too little, too late -- they'll only have three left. The implication, then, is that they would only be able to raise three times this year.

But I don't buy it. They want people to think that every meeting is live, and surely they haven't felt any need in the past to project only an amount of rate hikes less than or equal to the number of remaining press conferences. But there is a tendency among Fed policymakers to revise downward their forecasts through the year -- i.e., a September forecast for the funds rate is far more credible than a March forecast, primarily because there's only one, or at most two, more meetings with which to execute that policy.

So here's what will happen on Wednesday:

(a) The Fed will maintain the target range for the federal funds rate at 1/4 to 1/2 percent.

(b) They'll again get really bullish on the labor market: they want markets to react to positive data, and the labor reports are at the top of their list -- i.e., their goals are maximum sustainable EMPLOYMENT and 2 percent inflation, and they think one flows from the other via Phillips curve effects. The last jobs report was really good: 242k jobs created with 30k jobs from upward revisions over the past two months. The unemployment rate, at 4.9 percent, is at their median estimates of the natural rate -- so, within the framework of an accelerationist Phillips curve, they'd tend to think that would lead inflation to spike. But wages held steady at an anemic year-on-year growth rate (2.2), and many on the Fed are (rightly) skeptical of the Phillips curve.

Then again, their forecast for the unemployment rate this year, embedding their funds rate projections -- i.e., how low they're willing to let the unemployment rate go -- is 4.7 percent. Usually unemployment falls at a faster rate than the Fed projects and GDP/inflation grow slower, so that suggests at least (a) some skepticism in the Phillips curve model and (b) a belief that there's some -- not a lot, but some -- remaining slack in marginally attached and involuntary part-timers. So the labor market will likely impact the balance of risks, but not drive the overall rate decision.

(3) In January they struck the balance of risks from the statement: instead, they said they were reevaluating the balance of risks in light of global developments. Tim Duy seems to think they might revive this with an upward bias, but I highly doubt it. I think, if anything, the persistence in financial tightening and the headwinds from weak global growth is somewhat, but not even close to fully, offset by resilience in the labor market. But you might see them revive this with a "nearly balanced" risk calculus. More likely -- and this is my base case -- you'll see them say that "downward risks to the outlook for overall economic activity and inflation have diminished somewhat in recent weeks."

Basically, it'll be a "hawkish hold." They won't raise rates, but they'll signal, as they did in September, that another hike is well on its way and probably coming in June, barring catastrophe.

So, boring meeting, not much to see here. They want to tighten and they probably will again soon, but not yet.

I don't think the jobs reports are good at all- 78% of the created jobs were part time, and 82% were in the low paying service sector like retail and food service. Average hourly earnings are declining based on those numbers, as well as average hours worked; and this led Weekly earnings to drop .7%, the biggest drop in weekly earnings EVER. The jobs report does not signal a healthy economy, rather an economy that is transforming. The economy is shifting away from high paying specialized jobs (manufacturing and industry) to part time minimum wage jobs in the service sector. Manufacturing is now heavily contracting, and PMI dropped 3.5% to under 50. This partially explains February's data that shows exports at the lowest level in almost five years-It's hard to export the things created by bartenders and waiters. Meanwhile, we lost much higher-paying full time jobs in manufacturing, mining, and logging that would have produced things capable of being exported. Yes jobs are being created, but only at the expense of higher-paying jobs that are being destroyed. If a company replaces a full-time worker with two part-time workers, the statistics count that as a job gain. But this only holds up if you count quantity while ignoring quality.
ResponsiblyIrresponsible
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3/14/2016 7:38:53 PM
Posted: 8 months ago
At 3/14/2016 7:37:16 PM, walker_harris3 wrote:

If you want me to actually respond to this, much less take it seriously, you should (a) learn how to indent, rather than writing it out as one giant block of mess and (b) tell me where your numbers are coming from, because I can almost guarantee they're bullsh1t.
~ResponsiblyIrresponsible

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ResponsiblyIrresponsible
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3/14/2016 7:50:23 PM
Posted: 8 months ago
At 3/14/2016 7:37:16 PM, walker_harris3 wrote:

Hey, why not? I'll respond to this.

I don't think the jobs reports are good at all- 78% of the created jobs were part time,

I don't know where this number came from, but look at these graphs:

http://blogs.wsj.com...

Look at the "What Kinds of Jobs" graph. The vast majority of jobs created in this expansion were full-time jobs.

and 82% were in the low paying service sector like retail and food service.

Don't know where this number came from, and frankly there isn't any reason to actually care.

Average hourly earnings are declining based on those numbers, as well as average hours worked;

Wages are up on the year by about 2.2 percent, after growing 2.5 for the past few months -- and that's about as good as it's going to get. Hours worked has been (a) trending up on balance and (b) any downward movements are a direct function of the energy/manufacturing, which is likely a transitory development AND a far smaller portion of the economy than services.

and this led Weekly earnings to drop .7%, the biggest drop in weekly earnings EVER.

I don't know if this is the case, but you should know better than to cherrypick numbers -- i.e., you should know that weekly data is incredibly volatile and unreflective of underlying trends. Wage gains have been weak as part of a underlying secular trend that has nothing to do with cyclicality.

The jobs report does not signal a healthy economy, rather an economy that is transforming.

Of course it's transforming -- it's been transforming since the 1990s. Globalization tends to do that. The labor market has been polarized for a while, but it's just flat-out wrong to look at 242k nfp, reasonably solid wage growth, an uptick in labor force participation and e-to-pop and NOT think this is a reasonably solid jobs report.

Not to mention the survey is taken on the 14th, and a bunch of pay hikes went into place on the 15th. Your numbers are just incredibly misleading.

The economy is shifting away from high paying specialized jobs (manufacturing and industry) to part time minimum wage jobs in the service sector. Manufacturing is now heavily contracting, and PMI dropped 3.5% to under 50.

Actually, the manufacturing index (ISM) just saw a positive reading after a bunch of really horrid readings. You can say manufacturing sucks, but (a) that's been a secular trend since the 1970s, (b) it's because of transitory effects (low oil prices and the appreciating dollar) that already show signs of abating somewhat, and (b) it's a far less important component of the economy today than it was.

This partially explains February's data that shows exports at the lowest level in almost five years-It's hard to export the things created by bartenders and waiters.

I don't know if that's the case, but the dollar has been on the rise for almost a year now. Of course exports are going to be a headwind -- I'm talking about nfp, not the GDP numbers, but even THEN GDP tracking forecasts from, for instance, the Atlanta Fed's GDPNow model are above trend.

Meanwhile, we lost much higher-paying full time jobs in manufacturing, mining, and logging that would have produced things capable of being exported.

Yeah, because oil prices have been collapsing. They won't be collapsing forever.

Yes jobs are being created, but only at the expense of higher-paying jobs that are being destroyed.

Total hogwash.

If a company replaces a full-time worker with two part-time workers, the statistics count that as a job gain. But this only holds up if you count quantity while ignoring quality.

I've already proven to you that part-time work hasn't increased materially -- there's been a structural increase in PTER, which has nevertheless tapered off a bit in recent years, but this is an incredibly misleading and inaccurate story.
~ResponsiblyIrresponsible

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TheFlex
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3/14/2016 7:57:30 PM
Posted: 8 months ago
At 3/14/2016 7:53:11 PM, ResponsiblyIrresponsible wrote:
Oh, hey, look at that: I smell plagiarism!

http://www.realclearmarkets.com...

At least you know where the numbers came from now?
ResponsiblyIrresponsible
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3/14/2016 8:00:38 PM
Posted: 8 months ago
At 3/14/2016 7:57:30 PM, TheFlex wrote:
At 3/14/2016 7:53:11 PM, ResponsiblyIrresponsible wrote:
Oh, hey, look at that: I smell plagiarism!

http://www.realclearmarkets.com...

At least you know where the numbers came from now?

Lol, yup. I think it came from some conspiracy-loving, anti-Obama hit sight, but it also appeared here. Naturally, there's no citation for the numbers.

It's funny: I read the labor reports. I've been reading the labor reports. I don't cherrypick them. That probably explains the lack of cognitive dissonance.
~ResponsiblyIrresponsible

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ResponsiblyIrresponsible
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3/16/2016 6:10:40 PM
Posted: 8 months ago
The Fed never ceases to amaze me....

(a) They didn't touch the funds rate, check.

(b) Didn't touch their assessment of the labor market.

(c) Didn't touch the balance of risks -- in fact, REMOVED it entirely from the statement, only saying that global development "posed risks."

(d) Revised headline projection down a bit, kept core where it was, revised UP unemployment projections (i.e., lower unemployment rate) over the next few years (meaning they're willing to tolerate lower unemployment) and revised DOWN their median NAIRU estimate.

(e) Cut their funds rate projections by A LOT -- now projecting two, not four, rate hikes this year.

My goodness... that was MUCH more dovish than I would've expected, but I'll take it. Good job, Janet.
~ResponsiblyIrresponsible

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ResponsiblyIrresponsible
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3/16/2016 6:15:07 PM
Posted: 8 months ago
And, naturally, Space-Cadet-In-Training, Esther George, dissents -- wanting a rate hike!

I was right on that, too. Kudos, Loretta.
~ResponsiblyIrresponsible

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