« Romer on Growth Theory and 'Work That is Scientifically Unjustifiable' | Main | Links for 05-01-15 »

Thursday, April 30, 2015

Fed Watch: Data Note

Tim Duy:

Data Note, by Tim Duy: The Personal Income and Outlays report for March was released today. The pace of spending accelerated to 0.3% in real terms, the highest since last November and indication that the economy is perhaps shaking off some of its winter blues. On the other hand, inflation undershot the Fed's target for the 35th consecutive month, with core-inflation climbing just 1.3% over the past year. I would be a little wary that Fed officials won't find room for a somewhat more optimistic read on the data. Indeed, core-inflation on a monthly basis is also recovering from a winter stumble:

PCEa043015

The annualized monthly rate was for core-PCE inflation was 1.79% in March, arguably within spitting distance of the Fed's target. Definitely something policymakers will be watching. At least those not thinking that 2% is too low a target in any event. So although we should keep an eye on the year-over-year numbers, we should be listening for what policymakers say about the month-over-month trends. Right now, those trends argue in favor of the "transitory" hypothesis.
Monetary policymakers will also be watching, obviously, next week's employment report. Only two left before the June meeting, and they need to be reasonably good for the pendulum to swing back to the hawks by then. But would only "reasonably good" be "good" enough? One thing I am watching is how much longer Fed officials will be content to risk falling behind the curve. I think the Fed is concerned about the potential for a discontinuous jump in wage growth as the economy approaches 5% unemployment, illustrated as:

PHILLIPS043015

This is why Fed Chair Janet Yellen does not believe they need to see accelerating wage growth before hiking rates - she has faith it is coming and that the lower unemployment is when the dam breaks, the higher the odds of a jump in wage growth that signals an economy with rapidly diminishing labor slack. They want to be reacting slowing ahead of such a scenario, rather than quickly on the other side. 
Bottom Line: The Fed is in "wait-and-see" mode after the weak first quarter, and odds are against the Fed seeing a path to a June rate hike. But I that remain wary that the patience of the newly data-dependent Fed has worn thinner than commonly believed.

    Posted by on Thursday, April 30, 2015 at 06:10 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (7)


    Comments

    Feed You can follow this conversation by subscribing to the comment feed for this post.