reports
- Kevin Burgett
Weekly Update 6/25/18
At an ECB conference in Portugal, Powell indicated that “concerns seem to be rising†about trade policy (June 20). He repeated that, “If you ask is it in the forecast yet, is it in the outlook, the answer is no. And you don’t see it in the performance of the economy.†However, he noted that “for the first time we are hearing about decisions to postpone investment, postpone hiring, postpone making decisions. That is a new thing.†In his speech at the sa....
- Derek Tang
Risks to Balance Sheet Normalization Plans
The recent upward drift in the effective fed funds rate (EFFR) toward the upper bound of its target range occurred earlier than the Fed likely expected and prompted the interest rate on excess reserves (IOER rate) adjustment. The June 2018 Implementation Note that accompanied the FOMC statement said that the adjustment is “intended to fost....
- Kevin Burgett
Weekly Update 6/18/18
The June FOMC statement and the accompanying macro and funds rate projections were broadly as expected, reflecting a Committee that is somewhat more confident in the economic outlook than in March. Accordingly, they believe that it is appropriate for monetary policy to move toward neutral slightly faster. However, the Committee still .....
- Larry Meyer
FOMC Meeting
Today’s postmeeting statement and the accompanying macro and funds rate projections were broadly as expected, reflecting a Committee that is somewhat more confident in the economic outlook than in March. Accordingly, they believe that it is appropriate for monetary policy to move toward neutral slightly faster. However, the Committee s.......
- Kevin Burgett
FOMC Chatter
Since the May FOMC meeting, we adjusted our funds rate call, removing a hike in 2019 based on our expectation that the FOMC is likely to pause once the funds rate reaches its estimated neutral level, in mid2019. This change was informed in part by policymakers’ public remarks, which indicated that they are likely to approach further rate hikes much more cautiously once at neutral, and not by any change in the economic outlook, which remains very strong. Trade remained a major issue dominating ...
- Kevin Burgett
Weekly Update 6/11/18
We expect this week’s FOMC meeting to be quite eventful (see our FOMC Briefing). The statement could receive the biggest rewrite in quite a while, and the macro projections will be upgraded, with a corresponding upward shift in the dots. There were no public remarks from FOMC participants last week because of the blackout period ahead of this week’s FOMC meeting. We don’t expect recent geopolitical developments, including the latest trade act........
- Kevin Burgett
Macro Views
First things first: We’ve changed our funds rate call, and in this forecast we now assume three hikes, rather than four, in 2019. Our assumption is now four hikes in 2018, three hikes in 2019, and one more hike in 2020. That slight adjustment in our call was not about any change in the macroeconomic outlook, however. Rather, it was about rebalancing the risks around our call in light of FOMC participants’ willingness to tolerate inflation somewhat..........
- Larry Meyer
- Larry Meyer
Inflation Dynamics and Sustainability
We expect the unemployment rate in 2020 to be 3½%—a percentage point below the NAIRU—and inflation 2¼%—¼ percentage point above its objective. I call this: “Missing on both mandates, but feeling goodâ€! It would be a remarkable outcome, if sustainable. By sustainable, we mean over a period of two or three years, not indefinitely. To be sustainable, there has to be over this period a tradeoff between inflation and the unemployment rate that is stable. But that would contradict the mod...
- Larry Meyer
The Funds Rate Gap as a Predictor of Recessions
Policymakers have become more concerned about an inverted yield curve because a faster pace of rate hikes makes an inversion more likely and because inversions precede recessions. Another recession signal is a rise in the funds rate above its estimated neutral. These signals will often occur together because they both reflect a tightening of monetary policy that is especially aggressive........
- Kevin Burgett
Weekly Update 6/4/18:
We have adjusted our Fed call, and now our baseline is three hikes in 2019, rather than four. All told, our modal call is now four hikes in 2018, three hikes in 2019, and one hike in 2020. The adjustment reflects a reassessment of the FOMC’s reaction function in light of recent remarks and an accompanying rebalancing of the risks around our call, which we had already seen as tilted toward a slower pace of hikes next year. (Click here for the full analysis.) We did not make this adjustment beca...
- Larry Meyer
Change in the Call for 2019: 3 Hikes Instead of 4
We have adjusted our Fed call, and now our baseline is three hikes in 2019, rather than four. All told, our modal call is now four hikes in 2018, three hikes in 2019, and one hike in 2020. We made this adjustment not because of any change in the macroeconomic outlook. Rather, the adjustment reflects a reassessment of the FOMC’s reaction fu....
- Kevin Burgett
May Jobs Report Strong Across the Board
Payrolls increased 223K in May, and there was a net upward revision of 15K to March and April. The sixand 12-month averages remain close to 200K. After declining two tenths in April, the unemployment rate declined another tenth in May, to 3.8%. The participation rate edged down another tenth but remains in the relatively narrow channel in which it has moved over the past few years. The three-tenths decline in the unemployment rate over the last two months, in combination with a somewhat stronger...
- Kevin Burgett
Weekly Update 5/28/18
The minutes of the May FOMC meeting struck us as having a somewhat dovish tilt, on balance, specifically because of the discussion of the inflation outlook and the neutral funds rate. These minutes were markedly more emphatic about characterizing the inflation objective as “symmetric†and the goal of reaching that objective “on a sustained basis.†FOMC.....
- Larry Meyer
Oil Prices: The Effect of Demand, Political Forces, and the IMO
Oil prices have been rising, reaching as high as $80/bbl (Brent), more than $30/bbl higher than in mid-2017. We want to focus here on why oil prices have increased more than expected; whether we think the recent increase is sustainable; and what the effects on the U.S. economy and monetary policy might be. As always, our views of developments in the oil industry are informed by our ongoing discussion....
- Larry Meyer
The FOMC’s Tradeoff Between Inflation and Recession Risk
The FOMC is trying to navigate between tightening too much and precipitating a recession and tightening too little at the expense of a higher than acceptable inflation rate. We call this the tradeoff between inflation and recession probability. Tightening too much increases the prospect of inverting the yield curve and increasing the funds rate beyond its natural level, both of which are reliable indicators of recession. Tightening too little will leave inflation above the 2% o
- Larry Meyer
FOMC Minutes
There were few surprises in the minutes of the May FOMC meeting. The economic outlook was described as virtually unchanged relative to the previous FOMC meeting. It was noted that markets saw a June hike as a near-certainty, and the minutes concurred: “Most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation.†However, these minutes did st...
- Larry Meyer
Some Policymakers Fretting About An Inversion of the Yield Curve
When the FOMC raises rates late in a tightening cycle, the yield curve always flattens and the yield curve usually inverts. Inversions have always been followed by recessions. So it is understandable that some policymakers have indicated they would become cautious, or even resist, further rate hikes if the yield curve were to invert. We see it as close call whether or not the yield curve will invert. But recession risk increases as the yield curve flattens and that risk will build as the FOMC mo...
- Kevin Burgett
Weekly Update 5/21/18
The initial incoming monthly data for Q2 are consistent with a rebound in real GDP growth following the moderation in Q1. In particular, the retail sales report for April points to a strong trajectory for real consumer spending. FOMC participants continued to see the economic outlook as strong and point to three or four hikes this year. Board nomin....
- Derek Tang
Weekly Update 5/14/18
FOMC participants, like us, remain comfortable with the outlook, including an expected rebound in Q2 and a modest overshoot of the inflation objective. Sources of uncertainty included the effects of the recent tax bill as well as trade—both the effects of prospective policy actions and the effects of policy uncertainty itself. In addition, the recent rise in oil prices entered the discussion of some FOMC participants as a factor in the outlooks for both economic output.....
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