Fed Watch: Reappearing After a Long Absence

Tim Duy has a Fed Watch in anticipation of tomorrow's rate decision from the FOMC:

Reappearing After a Long Absence, by Tim Duy: I have been missing in action for the past few weeks, neglecting Fed watching as I pushed forward other personal and professional commitments. Moreover, as I alluded to the last time I wrote, events were unfolding in such a way that I had little too add. Bond market bulls were pushing yields to remarkably low levels on the back of “the Fed is about to ease” story. I found that story untenable then, but experience has taught me that sometimes it is better to stand aside than get in the way of a charging pack of bulls – or bears for that matter.

But I have been looking for a time to jump back into the water, and the start of the FOMC’s two day meeting is as good an opportunity as any.  Especially now that yields have rebounded, and expectations of a rate cut have been pushed out deeper into 2007. Of course, the outcome of this meeting is something of a foregone conclusion, with the Fed comfortable to sit on the sidelines for the time being. Incoming data still point to a slowdown in overall economic activity, but inflation remains well above any reasonable comfort level. As a group, the Fed still bets that the combination of slowing activity and moderating energy costs will be enough to bring core inflation down, albeit gradually.

I find myself pulled in the same direction as William Polley and David Altig regarding the odds of a soft landing – it appears that the housing and auto slowdowns are mostly sector specific event at this point. I find David’s comments interesting:

In my line of business I have the opportunity to hear from a lot of people who are, as they say, close to the ground -- folks actually making stuff, hiring people, extending loans, putting together deals. My thoroughly unscientific sense is that the distribution of beliefs out there suggests things are more likely to get better than get worse.

This is consistent with my recent experiences as well – more complaints about lack of labor than anything else. Of course, it is reasonable to respond that the housing slowdown hasn’t had time to filter through the rest of the economy just yet. In any event, I noticed a similar theme in the minutes from the September FOMC meeting:

Although some survey evidence suggested that some firms were trimming capital spending plans, participants reported that their business contacts generally were quite positive about the economic outlook and the strength of demand for their products.

Moreover, I am challenged to accept the hard landing story with initial unemployment claims still hovering near 300k and consumer confidence bouncing back, at least as reported in the UMich preliminary numbers. Note also the rebound in commodity prices reported many places, including econbrowser. Will oil be far behind?

Regarding the outcome of this meeting, I think we are all looking to the statement for some guidance – I anticipate something very similar to the last statement (the one I wasn’t particularly happy with at the time). I cannot see that they are eager to pull back from the inflation fears; recent numbers just don’t support that move yet. No, I anticipate that the asymmetric bias will remain in place. I am very interested to see if Richmond Fed President Jeffery Lacker dissents for a third consecutive meeting.  I don’t see what would have changed his mind in the past few weeks, but the lack of a dissent would be interpreted by market participants as putting a rate cut in the near term back in play. They don’t want to send that message. I expect the message they want to send is “With inflation rate uncomfortably high, rates will be held steady for the foreseeable future, barring a clear, sharp deceleration in economic activity. For now, our foot continues to hover over the break, not the gas.”

Comments

[CalculatedRisk]

Welcome back! We finally get to the quarter(s) that matter for the housing bust (Q4 2006 through Q2 2007) and everyone is moving towards a soft landing. Why do the next few quarters matter? Because housing related jobs losses will start in earnest this quarter. And house prices will start falling nationwide in the next quarter or two - and that will impact equity withdrawal - and presumably consumption.

Really nothing has happened yet for the real economy, except a decline in Residential Investment. And what impact does declining RI have UNTIL jobs are lost? OK, it hits reported GDP, but that is it.

I'll grant that the low weekly unemployment claims is encouraging. But let's see if they stay low for another quarter or two.

Once again, welcome back!

[spencer]

I'm starting to see a significant pick-up in high tech
employment in the Boston area for the first time in years.

A good leading indicator of the Taylor Rule is the ratio of commodity prices to unemployment claims, and after falling earlier this years this ratio is starting to rebound.

[Bupa]

"And what impact does declining RI have UNTIL jobs are lost? OK, it hits reported GDP, but that is it."

Don't forget reported GDP is released with a lag. By the time it is released we either will or will not be seeing the lost jobs.