I spoke to Eric Rosengren recently about monetary policy, and he sounded a bit concerned. We've posted an edited transcript of the interview here.
He worries raising short-term rates fast could be very unpredictable and makes a case for selling assets wsj.com/articles/trans…
The Fed "continued to do asset purchases for too long," said Rosengren. (He cited health reasons when he resigned from the Boston Fed last September, nine months ahead of a mandatory retirement, following scrutiny of his financial disclosures.)
Rosengren isn't suggesting that these type of active balance sheet sales are what the Fed *will* do, but he lays out the argument for why it would be a better way to tighten financial conditions and depress risk taking.
Rosengren says that the Fed's new framework was a reasonable thing to do at the time the Fed did it, but that the current environment is one the Fed's new framework wasn't at all designed to address
He warns against allowing frameworks to "straitjacket" policy when the data turn
The Fed's December projections, which suggested a very soft landing, are "looking much less likely now," says Rosengren, because of repeated supply shocks and labor-market expectations for wages and salaries that aren't consistent with 2% inflation. wsj.com/articles/trans…
• • •
Missing some Tweet in this thread? You can try to
force a refresh
A year ago, the prospect that housing might not meaningfully disinflate spooked markets. But those fears were dismissed as the year went on. Housing has meaningfully contributed to the inflation slowdown, as expected since late '22.
What about core nonhousing services, the bucket Powell called out at the end of '22, when the Fed was still worried about too-high wages?
(Note: Powell was calling out a different measure, the PCE, which is constructed differently)
It's also coming down, though more unevenly.
That leaves core goods. They provided a great deal of the initial core price disinflation in 2023, which continued last year.
But core goods has recently ticked higher, and if tariffs add to price pressures, this is where you are likely to see it first.
"Year-ahead inflation expectations jumped up from 3.3% last month to 4.3% this month, the highest reading since November 2023 and marking two consecutive months of unusually large increases. This is only the fifth time in 14 years we have seen such a large one-month rise (one percentage point or more) in year-ahead inflation expectations."
Yes, caveats apply:
1) The increase in expectations hews to partisan lines, as Democrats generally think inflation will be much higher than it has been and as those who expect a big increase in tariffs also think inflation will be higher.
2) The consumer survey panel switched last year to online surveys instead of phone, which creates a structural break in the time series
3) The survey has picked up a big increase in 1-year-ahead expectations two years ago that wasn't captured in others (like the FRBNY consumer survey). The FRBNY survey data for January hasn't been published yet.
But this is an unusually large increase for a period where gas prices haven't made a big move, highlighting the way tariff risks could complicate the outlook for price-setting in 2025.
If you have been listening to Fed officials recently, you will hear several of them are especially focused on inflation expectations. wsj.com/economy/centra…
Q4 data in the employment cost index shows a cooling labor market
Wages and salaries for private sector workers ex-incentive paid occupations rose 3.8% on the year, the lowest since '21
The QoQ increase (+0.5%) was the mildest for a Q4 since 2020
Total compensation for all private-industry workers held steady in Q4, rising 3.6% from a year earlier.
You can also see the long tails of the big wage increases of 2021-22 continuing to filter through the economy as union pay raises have echoed non-union pay with a two-year-or-so lag.
Nonunion compensation growth is holding steady (+3.4% YoY).
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")