Brief thread on today's employment report.

This strong report *increases* the odds of recession. Aside from the payroll number, two things are distressing for the #Fed:

1) Average hourly earnings are annualizing 5.2% for the past 3 months and pointing up-way too high. 1/4 2) The labor force participation rate dropped again.

Participation is nowhere near pre-Covid levels and has been pointing down for a few months. This makes the labor market even tighter, support further wage growth above sustainable levels, and boosts inflation. 2/4

Brief thread on the likelihood of a soft landing.

Powell said that a soft landing is challenging in this situation-I agree.

He also said that soft landings are not unusual-I am not so sure.

The chart shows the nominal neutral rate vs the fed funds rate since 1961. 1/6 Powell mentioned 3 tightening episodes that did not result in recessions: 1965, 1984, and 1994.

I wouldn't count 1965. It was the continuation of hikes started long before; policy stayed well below neutral as neutral was also increasing; it became just marginally less easy. 2/6

Brief thread, based on a good BBG story by @mccormickliz: Should the Fed tighten policy more via the balance sheet (QT) than via rate hikes?

Some people seem to think this would be a good idea because it would "steepen the yield curve." It is not. Here is why. 1/6 Both QT and rate hikes are ways to tighten policy. The purpose of policy tightening is to raise borrowing costs. QT does that, and fed funds rate hikes do that too as they propagate across the yield curve. 2/6

The CPI today was exactly in line with consensus. But it's becoming harder and harder to blame the price increases just on special factors.

Even the core-core (CPI ex food, energy, shelter, and used vehicles) is up 5.2% year on year. This is a headache for the #Fed. 1/6 Of course, inflation is way above target and needs to come down. But oil prices are raising fast. Among other consequences, gas prices are at the highest in many years.

@NancyRLazar1 and our Econ Team estimate that a 30% increase in gas prices reduces consumption by 0.6%. 2/6

Brief thread on Fed and inflation.
Interesting how many formerly dovish Fed officials think that the Fed should get aggressive on inflation now. Of course inflation is high, but what if it comes back down on its own? What would be the consequences? 1/6

marketwatch.com/story/fed-has-… To begin with, it's consensus that inflation will decline next year. The chart below is from our @csm_research client survey--core inflation down to 2.6% in 2022. Professional forecasters are at 2.3%. The Fed is at 2%. 2/6

Short thread on a presumed "hawkish pivot" by Powell now that he has been renominated. I'm asked about it a lot, so here it goes.

The story posits that Powell will turn hawkish now that the uncertainty about his future has cleared up. I don't buy it. 1/5 First, that line of thinking implies that Powell misrepresented his and the FOMC's views in the past several months in order to get the nomination. I find that hard to believe, to put it mildly. 2/5

Thread inspired by this excellent piece by @rachsieg on recent #Fed officials' trading problems and how those could affect the chair nomination.

The decision the President will have to make is crucial, which is why I keep harping on this. 1/7
washingtonpost.com/business/2021/… It seems that the trading issue is being exploited against Powell by those who want a more politicized #Fed.

The goal seems to be not so much to improve Fed ethics but to use the Fed to address issues (climate change, racial inequality etc) that can't be fixed in Congress. 2/7

Short thread on the consequences of picking the next #Fed chair, inspired by this good piece by @chrisjcondon, @StevenTDennis, and @SalehaMohsin.

I agree with the main take, including that Powell "rebuilt bipartisan respect for the Fed." 1/8

bloomberg.com/news/articles/… If you look at betting markets, Powell has very high odds of getting renominated. I think 84% is grossly exaggerated because I suspect Sen. Warren et al won't give up easily. But I give him the edge at this point, maybe 60-40. 2/8

Brief thread on the Fed's attitude towards inflation.

The July minutes reiterated that the general FOMC view is that currently elevated inflation is likely transitory. No complaints from me here—I agree, and the data (for now, at least) support it. 1/X However, "most" FOMC participants also believe that substantial further progress has been made towards the inflation goal.

I struggle with this. If higher inflation is transitory, then the progress made so far will be ephemeral and eventually prove to be no progress at all. 2/X

Brief thread on real yields.

One of the questions I am asked often is what these very low real TIPS yields mean. Many tend to take them as signs of bad news for US growth. But is that read accurate? 1/4 The problem is that there are other things that "contaminate" TIPS yields and that muddle the waters. Specifically, these things are risk premiums and liquidity premiums.

We can always express TIPS yields as follows (estimates from DKW). 2/4

Short thread.

The Treasury mkt continues to gyrate. It's interesting how momentous the June FOMC meeting was for the mkt. Since then:

1. The expected trajectory for the FFR rotated (higher rates in years 1-3, a lot lower after (i.e. the mkt doesn't believe in FAIT at all). 2. The market's estimate of the neutral rate (the expected FFR 7-10 years ahead) collapsed and continues to move down (left). Most of it is lower inflation expectations not lower expected real rates (right).

Brief thread to look at the damage that the FOMC meeting did to market expectations and the market outlook for the US economy.

Most people point to the sharp decline in 5Y fwd breakevens, which were approaching better levels and now are sinking. Yes, but there is more. 1/6 The market is 100% buying that the Fed will raise rates sooner and faster than previously thought (it always did, and even more so after the FOMC). Look at the higher expected trajectory for the FFR for the first four years. 2/6

Thread: Interesting results from the NY Fed’s March surveys. Bottom line, the surveys confirm that the #Fed is getting only half of its message across to investors.

First, both primary dealers and market participants see high odds of early and fast liftoff. 1/6 Second, the odds of 2022 liftoff are about flat since December, but the odds of 2023 liftoff have increased to about 70%, according to primary dealers. A bit less according to broader market participants. 2/6

1/8 This is a thread about whether Fed policy is really as easy and dovish as it seems and as the Fed intends it to be.

I would argue it is not, and not because the Fed doesn't want it to be, but because markets are skeptical of the new Fed's framework, as the chart shows. 2/8 Monetary policy works via financial markets, and financial markets price interest rates in part based on expectations of what the Fed will do in the future.

This year, markets have pushed up the expected path for the fed funds rate a lot, despite the Fed's reassurances.

1/5 As promised, here are the results of our survey of expectations ahead to tomorrow' #FOMC meeting.

Respondents see strong growth this year and (substantially less so) later. But they don't see either the labor market close to maximum employment or inflation overshooting. 2/5 This notwithstanding, 77% or respondents see the Fed raising rates before the end of 2013. I read this, coupled with the modest forecast for inflation, as a sign that investors do not fully believe that the Fed is committed to its new average inflation targeting framework.

1/10 This incorrect reading (summarized in the story below) of what’s going on in the TIPS market is pervasive these days.

Here is a refresher of how to interpret signals from the TIPS market (thread).

@LizMcCormickWV @ctorresreporter @jbensondurham

bloomberg.com/news/articles/… 2/10 The TIPS rate can be expressed as follows:

TIPS Rate =
Expected Average Real Fed Funds Rate +
Real Term Premium +
Liquidity Premium

The liquidity premium reflects normally lower liquidity in the TIPS vs nominal market (investors demand a premium to hold TIPS).

I am getting a significant amount of pushback against the Fed actions today, on the ground that they only help financial markets and not real people, and that the Fed is up to its old 2008 tricks.

I get the frustration, but I don't agree with the conclusion. Here is why. /1 First, the Fed’s objective is to preserve employment, not to bail out investors or reckless corporate types. Of course, the two are connected, but we should be a lot more agitated if the Fed disregarded its employment mandate to teach a lesson to leveraged businesses. /2