3 weeks ago I called on the Fed to pivot. Since then the data has mostly (but not entirely) strengthened my argument and the Fed is beginning to pivot.
My case relied on any *one* of these three:
1. Getting closer to max employment
2. Inflation above target
3. Policy loosening
My case relied on any *one* of these three:
1. Getting closer to max employment
2. Inflation above target
3. Policy loosening
1. The last jobs report was mixed w/ a mediocre headline number & a very strong household number (a large drop in unemployment and a rise in participation). UI claims have been plummeting and are the lowest ever (as a share of the workforce). piie.com/blogs/realtime…
On balance I think most people that follow the labor market thought the November report was strong. I don't think we're at full employment but 4.2% is a lot closer than we were. And so expansionary policy is still warranted it just doesn't need to be as/increasingly expansionary.
2. Today's inflation data should shift you a smidge towards being more concerned than you were three week ago but only a smidge. Definitely not breaking in a surprisingly favorable direction.
https://twitter.com/jasonfurman/status/1469300771137142786?s=20
3. Finally, in some respects monetary policy has tightened w/ Powell's pivot & speeches from others. One more rate hike is now priced in. Inflation expectations have moderated a little over the last few weeks (maybe omicron?) so short-term real rates are higher. And $ stronger.
But longer-term real rates are down further and all in the Goldman Sachs Financial Conditions index shows some very slight loosening over this period. publishing.gs.com/content/themes…
Looking forward (except these data which--other than financial market data--are backward looking), there is omicron which has increased uncertainty a lot and increased the value of some optionality even if my best guess is no large economic impact.
All in, your views on monetary policy shouldn't have changed much in the last couple of weeks, maybe a little more justification for less looseness.
What I want to see at next week's FOMC:
1. More concern about inflation / higher inflation forecast.
2. Clarity that liftoff can happen before max employment.
3. Asset purchases ending in Mar.
4. Prepare for liftoff in May or June w/ hikes every other mtg BUT data dependent.
1. More concern about inflation / higher inflation forecast.
2. Clarity that liftoff can happen before max employment.
3. Asset purchases ending in Mar.
4. Prepare for liftoff in May or June w/ hikes every other mtg BUT data dependent.
Here is a thread on my paper with links to the paper and other versions of it.
https://twitter.com/jasonfurman/status/1462880674566737920?s=20
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