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…
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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