New research from Gilchrist, Wei, Yue and Zakrajšek analyzes the impact the Fed's corporate credit backstop had on funding costs for large companies nber.org/papers/w27809
"The announcement ... influenced credit spreads by significantly reducing near-term default risk."
"The benchmark spread for investment-grade U.S. corporate bonds widened nearly 100 basis points—from already elevated levels—over the few days after [the announcement of the CPFF and MMLF] while the corresponding spread for high-yield bonds jumped 180 bps over the same period."
After the announcement of the corporate lending backstop, bonds below the five-year maturity cutoff experience a drop in credit spreads of 70 basis points, relative to investment-grade bonds above the five-year maturity cutoff, during the post-announcement period.
"Moreover, these effects occur relatively quickly—within 14 days of the April 9 announcement—and are long lasting."
"The total effect of the program announcement lowered credit spreads on eligible bonds by 20 basis points relative to ineligible bonds for an average issuer of both types of bonds."
"We consider all bonds issued by companies that were rated as investment grade before March 23 but were downgraded to a notch below investment grade during the subsequent 10 days and hence became SMCCF eligible with the April 9 announcement."
"When compared to the matched sample of ineligible bonds, fallen angels’ eligible bonds experienced a 340 basis point increase in credit spreads during the 10-day period following the March 23 announcement."
"We then show that the April 9 announcement reversed much of this run-up. In particular, credit spreads on newly eligible bonds issued by fallen angels fall 250 basis points in the ten days following the April 9 announcement."
• • •
Missing some Tweet in this thread? You can try to
force a refresh
The unemployment rate dropped back to 4.1% (to the second decimal-stans out there, 4.05%) back to where it was in June, before the July report that triggered the Sahm rule and increased alarm about labor-market softness.
After rising off of low levels last year, the share of permanent job losers has been stable so far this year.
Powell in the Q&A at NABE: The upward revisions of GDI were "quite interesting"
That GDI wasn't as low as once thought "removes a downside risk to the economy"
The upward revision to the savings rate does the same thing. "That suggests spending can continue at a healthy level"
Powell: There's still an unresolved tension between consumption data, which has been good, and the employment data, which has shown a cooling trend of late.
The labor market may give a better real-time picture. GDP doesn't predict downturns as well as labor data.
Powell's executive summary from the marginally better news on consumption from last week's NIPA revisions: "That's not going to stop us from looking really carefully at the labor market data."
• The big question is where the committee and chair sets the bar for a September cut.
• The cleanest signal probably comes from Powell's press conference because it's much easier to convey nuance there, but... wsj.com/economy/centra…
• Don't sleep on the FOMC statement. It's important.
While Powell's opening press conference statement likely aims to reflect the committee's views, the policy statement is what actually gets workshopped and voted on.
Hints could be dropped in any of the first 3 paragraphs
Look at briefing materials that go to policymakers before FOMC meetings and read the transcripts to see how extensively these changes are debated.
The Fed chair/staff come up with three drafts: Dovish ("Alternative A"), a middle ground ("Alt B") and Hawkish ("Alt C")
Private sector compensation growth was +1.1% in Q1 vs +0.9% in Q4
Because the Q1 '24 gain was slightly less than the Q1 '23 increase (+1.2%), the year-over-year rate of compensation growth edged down to slightly less than 4.1%
The ECI is seen inside the Fed as the highest-quality measure of compensation growth
Wages and salaries for private sector workers excluding incentive paid occupations was +1.3% in Q1 (vs +0.7% in Q4 2023 and +1.5% in Q1 2023)
The Y/Y rate fell to 4.2% from 4.3% in Q4
Compensation for all civilian workers is running slightly higher, potentially reflecting an interval of higher "catch-up" pay for state and local government workers
The Fed is set to retire its tightening bias at its policy meeting this week.
Officials have a first-class problem—inflation fell faster than they expected—but it poses a conundrum nevertheless: How soon and fast do you dial back restrictive policy?
There's a case for delaying cuts until mid-year or beyond that goes like this: If this is really such a restrictive policy, why is the economy doing so well?
Yes, real rates have been rising, but real incomes are also picking up as inflation comes down.
The case for cutting sooner, notes former Kansas City Fed President Esther George, is that the labor market at turning points "looks like it’s not too bad, and then it goes south quickly."
“We made a very aggressive tightening" that leaves policy well above neutral, she said.
Fed governor Chris Waller: Rate cuts are coming into view but the process should be “carefully calibrated and not rushed.”
As long as growth is fine, “I see no reason to move as quickly or cut as rapidly” as the Fed has in past cutting cycles.
This is a clear pivot from Waller: “From now on, the setting of policy needs to proceed with more caution to avoid over-tightening”
But but but … the Fed’s goal is sustainable 2% inflation. “That goal cannot be achieved for just a moment in time.”
Waller takes a bit of a victory lap on his analysis of the Beveridge curve co-authored with Andrew Figura from May 2022.
That analysis had earned caustic criticism from Larry Summers who said it contained “misleading conclusions” by suggesting a path for immaculate disinflation