Monday, January 12, 2015

Fairy Godfather
For quite a while, I’ve described Fed Chair Janet Yellen as the “Fairy Godmother of the Bull Market.” Apparently, FRB-Chicago President Charles Evans aspires to be the “Fairy Godfather of the Bull Market.” He certainly was last Thursday when the S&P 500 soared 1.8% on news reports that he said, “I don’t think we should be in a hurry to increase interest rates.” Evans said so during a discussion at the University of Chicago. Later in the presentation, he said such a move to tighten too soon would be a “catastrophe.” He appeared Friday morning on CNBC to give us all the opportunity to hear the same basic message directly from him.

He was interviewed right after the release of December’s employment report, which showed that the jobless rate fell to 5.6% from 5.8% the month before. That’s the lowest since June 2008. The short-term unemployment rate fell to 3.8%, the lowest since November 2007. However, Evans focused on average hourly earnings, which fell 0.2% m/m during December and was up only 1.7% y/y, the lowest since October 2012. He reiterated that he prefers to be “patient” before raising interest rates until wage inflation moves higher and price inflation rises back up to 2%.

On a few occasions late last year, I wrote that Evans is an important FOMC member. He is a voter this year on the FOMC. He is among the most dovish members of the committee. His views very often coincide with those of fellow doves Fed Chair Janet Yellen and FRB-NY President Bill Dudley. Evans first publicly counselled a “patient” approach to monetary normalization in a CNBC interview on 9/29 last year. Lo and behold, that word appeared for the first time in the 12/17 FOMC statement last year: “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.” The phrase also appeared three times in the minutes of that meeting, which was released last Wednesday. Let’s review some of its highlights:

(1) Interestingly, the dollar continued to soar on Thursday despite Evan’s suggestion that the Fed’s lift-off of interest rates should be postponed. That might be because the minutes reported:
With lower energy prices and the stronger dollar likely to keep inflation below target for some time, it was noted that the Committee might begin normalization at a time when core inflation was near current levels, although in that circumstance participants would want to be reasonably confident that inflation will move back toward 2 percent over time.
In other words, the Fed might be less patient than Evans would like. I am betting on Evans, which is why I think "one-and-done," or even "none-and-done," is more likely than normalization, i.e., a series of rate hikes later this year.

(2) The minutes defined the FOMC’s patience as follows:
Most participants thought the reference to patience indicated that the Committee was unlikely to begin the normalization process for at least the next couple of meetings.
That confirmed Yellen’s view on this subject, which she expressed at her 12/17 press conference. The next two meetings are on January 27-28 and March 17-18. So normalization might begin at the April 28-29 meeting, though I doubt it.

(3) I think that the strong dollar and weak overseas economic growth may increase the Fed’s patience. The minutes noted:
Many participants regarded the international situation as an important source of downside risks to domestic real activity and employment, particularly if declines in oil prices and the persistence of weak economic growth abroad had a substantial negative effect on global financial markets or if foreign policy responses were insufficient.
Exports of goods now account for 9.3% of current dollar GDP, up from 6.8% ten years ago. Real merchandise exports remained on an upward trend during November, rising 2.6% y/y. Some of the recent strength was attributable to exports of petroleum products, which are likely to decline as US production falls along with oil prices. If the dollar continues to strengthen and global economic growth remains lackluster, other exports might start to weaken too.

The Fed’s patience is also likely to persist as long as wage inflation remains around 2% rather than rising to 3%-4% as Yellen previously said she would like to see happen. As noted above, Evans is concerned that it actually declined to 1.7% y/y during December. So it’s heading in the wrong direction.

A 1/9 Bloomberg article on this subject titled “The Wage Weakness May Not Be as Bad as It Seems” reports: “Stores and online merchants hired a larger-than-usual army of seasonal workers to help keep up with the demand for holiday gift-giving. Inc. prepared for the crush this year by adding 80,000 seasonal workers, up from 70,000 last year.”

FRB-Atlanta Fed President Dennis Lockhart in an interview with Bloomberg news on Friday said, “I am prepared to look at the earnings numbers as potentially noise or month-to-month fluctuations that are not really telling of any condition in the economy that we have to worry about.” Yet he too is willing to be patient: “I don’t see a reason yet to accelerate my assumption of when a policy move might be appropriate.” He also gets to vote on the FOMC this year.
(Based on an excerpt from YRI Morning Briefing)

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