Economic First Look: An Influx of Divergent Views

 | Jan 26, 2013 | 10:30 AM EST  | Comments
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Monday

  • Durable Goods Orders, 8:30 a.m.
  • Pending Home Sales Index, 10 a.m.
  • Dallas Fed Manufacturing Survey, 10:30 a.m.

Tuesday

  • Federal Open Market Committee Meeting Begins
  • S&P Case-Shiller Home Price Index, 9 a.m.
  • Consumer Confidence (Conference Board measure), 10 a.m.

Wednesday

  • ADP Employment Report, 8:15 a.m.
  • Gross Domestic Product, 8:30 a.m.
  • Energy Information Administratoin Petroleum Status Report, 10:30 a.m.
  • Federal Open Market Committee Meeting Announcement, 2:15 p.m.

Thursday

  • Jobless Claims, 8:30 a.m.
  • Personal Income and Outlays, 8:30 a.m.
  • Employment Cost Index, 8:30 a.m.
  • Chicago Purchasing Managers Index, 9:45 a.m.

Friday

  • Motor Vehicle Sales (released by each automaker throughout day with media tally in late afternoon)
  • Employment Situation (aka nonfarm payrolls), 8:30 a.m.
  • Consumer Sentiment, 9:55 a.m.
  • Institute for Supply Management Manufacturing Index, 10 a.m.
  • Construction Spending, 10 a.m.

Generally, the employment-situation report dominates headlines whenever it is released This week, however, is the first Federal Open Market Committee meeting after the rotation of votes among the presidents of the district Federal Reserve banks. So, aside from mentioning that consensus forecasts for nonfarm payrolls this week are to come in at 160,000 -- in the same general range as we've recently seen -- I'm going to delve into the views of the new voters. I've assembled a bit of a cheat sheet with the recent views expressed by each Fed president who now has a vote on the FOMC. (The president of the New York Fed always has a vote, so I will not cover his views here -- only those of the new voting members.)

Chicago: Charles Evans

In his most recent speech on monetary policy, Evans maintains that current policy is appropriate. He says:

"Monetary policy has an important contribution to make. It should provide financial conditions that help produce the most robust demand growth we reasonably can achieve, with appropriate measures in place to safeguard price stability."

I would expect him to continue to favor bond purchases for the time being, as his speech emphasized the use of unemployment and inflation data as a basis for determining monetary policy. While there has been some talk of a few Fed officials who might desire to curtail bond purchases earlier, I don't think Evans would really want to risk the Fed's credibility -- and limit the effectiveness of its communication tools in the future -- by departing from what the Fed has already said.

Boston: Eric Rosengren

In a recent speech, the following statement is key to Rosengren's views on monetary policy:

"Being more than half a percent below our target for PCE inflation highlights why I believe aggressive monetary policy remains appropriate, given that the 7.8% unemployment rate is well above where the FOMC expects the unemployment rate to settle in the longer run." Or, if that wasn't clear enough, he later reiterates in stronger wording, "In conclusion I would just reiterate my view that continued monetary accommodation is absolutely appropriate and indeed needed as long as we are projected to miss on both elements of the Fed's dual mandate, inflation and employment."

He highlights a number of risks and headwinds to the global economy, and offers some hopeful signs, saying:

"Despite these headwinds at home and abroad, I do expect improvement in U.S. economic growth this year. While in the first half of 2013 I think the economy is likely to grow at roughly its potential level of growth, I expect growth in the second half of the year to be closer to 3% -- assuming that headwinds from fiscal imbalances around the world are not resolved in economically disruptive ways."

St. Louis: James Bullard

Bullard recently gave a speech about what constitutes a marked improvement in the employment situation. Rather than simply looking at the employment rate, he emphasizes how complicated employment matters really are. For example: Are job openings being posted but not being filled? Is the unemployment rate fluctuating because people are entering or leaving the labor force? How many jobs are being created in each month? What is the quality of new jobs being created? He seems to attempt to avoid being put into a box that states simply that the Fed will keep buying bonds until the simplistic threshold of a 6.5% unemployment rate is being met, as is currently the Fed's posture.

Indeed, in another presentation, he outlines why the Fed's current policy stance is appropriate. But this comes with a caveat, and that is that he has a problem with thresholds. Specifically, he notes:

"The use of thresholds is not a panacea. I have described elsewhere a number of issues that the Committee is likely to face going forward with this strategy, including:

  • "The FOMC cannot pretend to target medium- or long-term unemployment.
  • "The Committee needs to reiterate that it considers many more variables in attempting to gauge the state of the U.S. economy.
  • "The thresholds will likely be viewed as triggers for action."

He sees the economy's long-term potential growth rate as lower than consensus, meaning a lower hurdle to clear for monetary policy to continue. He pegs this rate as gross domestic product growth of 2.3%, and he sees economic growth coming in above that rate in the coming year. But he does see inflation remaining near the Fed's 2% target.

He also notes that interest-rate-sensitive areas of the economy -- such as housing and durable-goods manufacturing (e.g., autos) -- have already rebounded. This, he says, points to the efficacy of Fed policy so far. The remaining segments of the economy might not benefit as much from further easing. So I wouldn't be too surprised if he'd be less than enthusiastic about voluminous bond-buying far into the future in an attempt to meet that 6.5% unemployment rate the Fed now targets.

Kansas City: Esther George

In her most recent speech, she also mentioned how interest-rate sensitive sectors of the economy -- such as housing and durable goods manufacturing -- have benefited from the Fed's bond purchases and low rates. However, she highlighted the risks of the Fed's large-scale asset purchases (LSAPs). She warns:

"These purchases also have their own set of risks and are not without cost. At their current level and pace of growth, I believe they almost certainly increase the risk of complicating the FOMC's exit strategy. . . . Although [the actions of bond sales] are likely only well into the future, actively selling a large amount of agency MBS, as stated in the exit strategy principles, could be potentially disruptive to markets and market functioning, or cause an unwelcome rise in mortgage rates."

She also worries about the Fed maintaining control over inflation expectations if LSAPs continue unabated in the future.

Thus, she may join her counterpart from the opposite side of Missouri, James Bullard, in questioning ongoing bond purchases, probably not now, but perhaps at some point before we reach that 6.5% unemployment rate threshold. At this point, she does see the benefits of QE, but how long she will see them as necessary vs. unnecessarily risky remains to be seen. (In a bit of trivia, I might point out that her predecessor at the Kansas City Fed, Thomas Hoenig, often dissented at FOMC meetings.)

Given these divergent views of the new voters on the FOMC, we may have some interesting debates, if not dissents, at some point in the future.

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