Thursday, April 9, 2015

Fed: Dudley's on First
March employment data were released on Friday, when the stock market was closed. Futures dropped sharply on the disappointing news. Nevertheless, the S&P 500 rose 0.7% on Monday. That day, FRB-NY President Bill Dudley was the first member of the FOMC to comment on the economy following the employment report. Here were his key points:

(1) Snow. He put a positive spin on the weakness of the economy during the first quarter. He blamed it mostly on the weather, as Debbie and I have been doing:
For example, some of the recent softness is likely due to yet another harsh winter in the Northeast and the Midwest. My staff’s analysis of a measure of both the amount of snow and the population affected indicates that January and February weather was 20 to 25 percent more severe than the five-year average. Such large deviations appear to have meaningful negative impacts on a number of economic indicators.
(2) Oil. As Debbie and I have noted, he agreed that the plunge in oil prices may have a negative impact on the economy, particularly the energy industry. However, he accentuated the positive impact:
Starting with the positives, since the U.S. is still a net importer of petroleum, this development has provided substantial benefits, with our oil import bill down by about a ½ percentage point of GDP. As I indicated earlier, that represents a significant boost to real disposable income for households. How much this energy windfall boosts consumption will depend, though, on how much is spent versus saved.
(3) Dollar. About the dollar, Dudley said:
Another significant shock is the nearly 15 percent appreciation of the exchange value of the dollar since mid-2014. Such an appreciation makes U.S. exports more expensive and imports more competitive. My staff’s analysis concludes that an appreciation of this magnitude would, all else equal, reduce real GDP growth by about 0.6 percentage point over this year.
(4) Liftoff. His mostly optimistic spin on the economy suggested that he is still expecting the Fed to start raising interest rates this year. Previously, he suggested that it could happen at mid-year. In his latest comments, he was vague about the timing. Nevertheless, he reiterated that the process of normalizing monetary policy will be very gradual:
For financial markets, the likely path of short-term rates after lift-off is just as important as the timing of lift-off. Here, I anticipate that the path will be relatively shallow. Headwinds in the aftermath of the financial crisis are still in evidence, particularly the diminished availability and tougher terms for residential mortgage credit.
(5) Hedged. Dudley hedged his optimism on the economy as follows:
The unemployment rate was 5.5 percent in March: analysis by my staff suggests that the unemployment rate is nearing the point where we may begin to see a pickup in the pace of real wage gains. If this proves correct and unemployment continues to decline as I expect, then these stronger wage gains could help support solid income growth even if the pace of employment growth slows. However, it will be important to monitor developments to determine whether the softness in the March labor market report evident on Friday foreshadows a more substantial slowing in the labor market than I currently anticipate.
Dudley is the consummate two-handed economist.
(Based on an excerpt from YRI Morning Briefing)
Fed: The Minutes
The minutes of the March 17-18 FOMC meeting were released yesterday. The key point was that Fed officials were split on whether to start raising interest rates in June:
Several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting. However, others anticipated that the effects of energy price declines and the dollar’s appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year, and a couple of participants suggested that the economic outlook likely would not call for liftoff until 2016.
The trade-weighted dollar was mentioned 9 times, up from 7 times in the previous minutes.

Yesterday, in an interview with Reuters, FRB-NY President Bill Dudley said the Fed could still hike rates in June despite a weak start to the year, if economic data pick up over the next two months:
I could imagine circumstances where a June rate hike is still in play. If the next jobs report is strong...if second-quarter GDP look like it is bouncing quite sharply.
He said there were still good reasons for the Fed to hold off on liftoff to make sure as many workers as possible are pulled into the labor force. In addition, the weak first-quarter data and recent weak jobs report mean “the bar is probably a little bit higher” for a June hike. Seems to me that Dudley has too much free time.
(Based on an excerpt from YRI Morning Briefing)