Fed Watch: Back in the Game

I think Tim is glad winter quarter is over:

Back in the Game, by Tim Duy: My Christmas lights are still up. It is almost April, and my Christmas lights are still up. I used to tell myself, “I’ll never be that kind of guy.” You know, the type that thinks the lights go down on the Fourth of July, hell or high water. To be sure, my house is located off the road, secluded a bit from public view, so most people never notice the lights, keeping my little secret just that, a secret. That is, until my son notices the lights and insists they be plugged in, exposing my shame to the whole neighborhood – “He’s that kind of guy,” I can hear them all saying.

Which is a long way to say that winter term became a hole that seemed to get deeper the more I worked. I can’t even really say how it happened, although the endless stream of students will pretty much decimate what would otherwise have been a decent workday. And with my wife returning to work after maternity leave, Tuesdays, the day I watch the kids, just became a little more hectic as we settled into a new routine. You would be amazed how many exciting things happen on Tuesdays! Not just at my house, either. Just a few weeks ago global markets got a little scary. You may have noticed; myself, it was a rare day that I did not catch a bit of news.

As always, I have to put my attention toward the work that pays the bills first, somewhat unfortunate as Fed watching became a bit more interesting of late. Of course, the economy got more interesting first. The details have been covered far and wide, and can be summed up with one word: softer. A relief for the bears, especially after the initial, and, as it turned out, optimistic read on 4Q06 GDP growth. Expectations of stabilization in housing have yet to be realized. I can’t say that I am surprised; I have tended to believe that the downside in housing would progress longer than the bulls anticipated, but the damage would evolve more slowly than the bears anticipated. The tightening conditions in the mortgage market, particularly the subprime area, are knocking out another round of marginal buyers, promising to extend the housing weakness. The consumer is starting to look a bit anemic – a term that could also be applied to February’s employment report. More disconcerting to me has been the recent numbers on capital spending. Still, a bright spot was the stronger February ISM reading, belying concerns of a freefall in manufacturing and perhaps foretelling a more promising durable goods report this week. And initial jobless claims are not signaling impending doom either.

At the same time, productivity growth looks to be slowing down, while inflation remains stubbornly high. Perhaps a couple of more quarters of weak GDP growth are all that is needed to bring inflation back down. I hope so, but nagging at me is the possibility that potential growth is off a bit more than anticipated; this is especially the case if the productivity slowdown is not simply a mid-cycle pause and labor force growth rates are slowing as well. Regarding the latter, I still believe the decreased labor force participation rates are a secular trend. Moreover, the story I hear every time I venture forth into the real world comports with David Altig’s take on the JOLTS report. Simply not enough skilled workers left to go around.

All in all, the data suggested to me that the downside risks to growth were rising, but that inflation was still a concern, especially if potential output growth has pulled back. Lacking much guidance from Fedspeak (although, in retrospect, Chicago Fed President Michael Moskow had uttered some dovish remarks), the odds favored a steady policy from the Fed. Instead, the Fed managed a policy statement that pulled us about as close to neutral as possible while still keeping one eye on inflation. I don’t think the Fed was acting in response to recent market turbulence (a “Bernanke put”); I think it reflects policymaker’s honest assessment of the economy. I also find myself in agreement with Greg Ip today, who warns against expecting an imminent rate cut. To be sure, the Fed will eventually cut rates, but market participants have been consistently disappointed on this call since Hurricane Katrina. The Fed is usually not quick to cut rates.

So that is a starting point to getting back into the game. I foresee better time management this term – not a big surprise, as I have the Spring off from teaching.

Perhaps I will even get to those Christmas lights.

Comments

[EZRider]

Thank you Tim.

[calmo]

No doubt about those Xmas tree lights hanging out there all year round...and lit all day long too. If the world is not heating up after a couple of hundred years of Industrializing, then it must be naturally cooling and we must do all we can to keep it from freezing over.
Not only that, but when you are trying to find your way home in the taxi you can just tell the driver that yours is the Xmas lit house that is saving the neighborhood from an impending Ice Age.
Some of us have been worried about you Tim, thinking you might have finally gotten around to those dishes that have taken over what used to be the kitchen...or maybe it was the knee high grass in the front yard that was threatening the view of those Xmas tree lights.
But it was the teaching load and wouldn't I love to be in there.
Yes, we readers forget that your time and careful efforts here are given gratuitously...unlike some posters who seem to have all the time in the world when it comes to cutting the grass or doing the dishes.

Ok, where to bite:

The details have been covered far and wide, and can be summed up with one word: softer.

And this is what is said of the apple too, before it is said to be "off".