FOMC, Employment Report, Warsh, by Tim Duy: The FOMC meeting came and went with little fanfare this week. As expected, there was no policy change, with only small modifications to post-meeting statement. With only small changes, it is a struggle to read much into the statement. Some thoughts:
1. Business investment. The Fed drew attention to weak business investment. The recent gains in core capital goods orders and improving ISM manufacturing numbers could be pointing to an upturn in the months ahead, possibly enough to boost growth estimates. Keep an eye on this space.
2. Business/Consumer Confidence. The Fed cited the post-Trump improvement in confidence. These gains, however, could easily prove to be ephemeral. The Fed will see them as a risk to their outlook, but will need actual data before changing their outlook.
3. Inflation expectations. The Fed noted that market-based inflation compensation estimates remain low. I think this means that they are not panicking about the recent rise in such expectations; they remains well below pre-recession levels:
If they aren't panicking, neither should you. For what it's worth, I suspect that they will only address market-based inflation numbers when convenient and ignore them when inconvenient.
4. Inflation confidence. The Fed deleted the factors (energy, import prices) restraining inflation. This could be viewed as confidence in their inflation outlook (my initial response). Alternatively, it could be interpreted as saying they don't have any more excuses if inflation remains below target. Or, it could mean the former to some at the table, the latter to others at the table.
All that said, the changes were relatively minor and provide no concrete clues about the Fed's next move. My thoughts on March remains unchanged - without more supportive data, the odds of a March rate hike remains low.
Could the January employment report start building the case for a March hike? It sure can - if, in particular, the ADP report is a reliable predictor. But regardless of ADP, the case was building for a solid number - see Calculated Risk. The consensus expectation is 175k within a range of 155k to 190k. Taking the ADP number at face value suggests the report will prove to be better than expected:
I think there is upside risk to the consensus forecast this month. (Note the error bands. Forecasting the monthly NFP change is risky business). If that is indeed the reality, the Fed will take notice. They will certainly take notice if unemployment dips lower or wages spike higher.
This week I wrote a detailed response to former Federal Reserve Governor Kevin Warsh's recent WSJ op-ed. One interpretation of this puzzling op-ed is that auditions for the Fed Chair require you to find fault with the Fed regardless of whether or not you actually find fault. Hence he lists supposed reforms that more than anything already reflect current policy, knowing that if chosen to be Chair he would be able to maintain much of that policy. This, however, is something of a dangerous game because it undermines the credibility of the Fed - how much can we trust the Fed if one of their own is so critical of their policies? That credibility is especially vulnerable now given the extent of the current threats to Fed independence. In effect, he is giving the Fed's critics ammunition to weaken the institution he reportedly is in the race to lead. One would think this is then a counterproductive approach. Moreover, he is doing the public and market participants no favors by misrepresenting the Fed and its policies.
Bottom Line: And now we await the employment report...