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Futures were negative following Friday's dismal job showing but that lasted only as long as the the market open.
Right
on cue came dovish pronouncement from Fed governor William Dudley in a
speech to a New Jersey audience on the regional and national audience.
Reuters reports Rate Hike Timing Now Unclear.
The
timing of the Federal Reserve's interest rate hike, which would be its
first in nearly a decade, is unclear and for now policymakers must watch
that the U.S. economy's surprising recent weakness does not signal a
more substantial slowdown, a top Fed official said on Monday.
New
York Fed President William Dudley's comments were the latest sign that a
string of disappointing economic data, including a sharp drop in jobs
growth last month, is derailing a Fed plan to tighten monetary policy
around mid-year after more than six years of rock-bottom rates.
In
relatively dovish remarks to a business audience in Newark, New Jersey,
Dudley did not repeat his refrain that a rate hike could reasonably be
expected to come by mid-2015.
A permanent voting member
of the Fed's policy panel and a close ally of Fed Chair Janet Yellen,
Dudley repeated that the rate hike would come once the labor market
improves more and when policymakers are reasonably confident that low
inflation will return to a 2 percent goal.
"The timing
of normalization will be data dependent and remains uncertain because
the future evolution of the economy cannot be fully anticipated," he
said, adding he expects the path of rate hikes to be "relatively
shallow."
Low oil prices and the drop in domestic
drilling will exert a "meaningful drag" on U.S. economic activity, he
said. The strong dollar will continue to hurt U.S. trade performance,
and has already shaved an estimated 0.6 percentage point from overall
2015 growth, he added.
Longer term, he said the Fed's key policy rate will probably rise to only about 3.5 percent, lower than previously thought.
Dudley
has been under political pressure for perceived regulatory missteps by
his New York Fed, with lawmakers and even one former Fed official
floating changes. But Dudley defended the status quo on Monday, saying
his Fed bank should continue to play a key role in monetary policy
during periods of stress.
Text of Dudley Speech
Reuters, as is typical from mainstream media, did not bother linking to the text of Dudley's speech.
Inquiring minds may wish to read Dudley's Speech on the Regional and National Economy at the New Jersey Performing Arts Center, Newark, New Jersey.
His speech was certainly on the dovish side. Yet, it did contain many positives.
Dudley Snips
Economic
performance in this cycle has been disappointing compared to historical
patterns. ... despite very accommodative financial conditions and
record corporate profits, growth of business fixed investment has been
tepid.
Looking forward, my outlook for 2015 is that
economic growth will be close to the pace of the past two years,
supported by continued solid fundamentals and accommodative financial
conditions. If I am correct, then this would lead to a further
reduction of labor market slack, with the unemployment rate approaching 5
percent by the second half of the year.
The pace of
improvement in the labor market has slowed in recent months from the
strong pace at the end of last year. Nonfarm payroll employment
increased in the first quarter by about 200,000 per month, well below
the pace of the fourth quarter. This slowdown was broad-based, with job
growth slowing in both the goods-producing and the service-providing
sectors.
The unemployment rate was 5.5 percent in
March: analysis by my staff suggests that the unemployment rate is
nearing the point where we may begin to see a pickup in the pace of real
wage gains. If this proves correct and unemployment continues to
decline as I expect, then these stronger wage gains could help support
solid income growth even if the pace of employment growth slows.
However, it will be important to monitor developments to determine
whether the softness in the March labor market report evident on Friday
foreshadows a more substantial slowing in the labor market than I
currently anticipate.
The March labor market report is
another indicator that the first quarter is likely to be quite weak.
Our current projection is that the economy will grow at about a 1
percent annual rate in the first quarter of 2015. This softer
performance is suggested by a wide range of recent indicators that have
surprised to the downside over the past couple of months. Examples of
such indicators include retail sales, the ISM manufacturing index,
manufacturing production and orders, and single-family housing starts.
Overall,
I view these downside surprises as reflecting temporary factors to a
significant degree. For example, some of the recent softness is likely
due to yet another harsh winter in the Northeast and the Midwest. My
staff’s analysis of a measure of both the amount of snow and the
population affected indicates that January and February weather was 20
to 25 percent more severe than the five-year average. Such large
deviations appear to have meaningful negative impacts on a number of
economic indicators.
Even so, there are some downside
risks to the growth outlook. In particular, the steep decline in crude
oil prices is likely to lead to a further sharp drop in U.S. oil and gas
investment. Additionally, the significant rise in the value of the
dollar is likely to lead to weaker U.S. trade performance.
Turning
to the negatives, the support to growth from rapidly rising U.S. oil
production almost certainly will fade away. U.S. oil production has
been rising rapidly for several years, due largely to new technology
that has expanded the amount of oil that can be recovered from existing
wells and that has facilitated shale oil production by fracking. Now,
with prices dramatically lower, U.S. oil exploration and drilling
activity is falling off very sharply. This will exert a meaningful drag
on economic activity.
Another significant shock is the
nearly 15 percent appreciation of the exchange value of the dollar since
mid-2014. Such an appreciation makes U.S. exports more expensive and
imports more competitive. My staff’s analysis concludes that an
appreciation of this magnitude would, all else equal, reduce real GDP
growth by about 0.6 percentage point over this year.
Turning
to inflation, the data continue to come in below the FOMC’s objective
of a 2 percent annualized rate for the personal consumption expenditures
(PCE) deflator. The twelve-month change of the total PCE deflator was
0.3 percent in February, with the core PCE deflator at 1.4 percent.
Despite this, my expectation is that inflation will begin to firm later
this year. In particular, most of the impact from the decline in energy
prices that has weighed down overall inflation is likely over.
Monetary Policy
As
the FOMC has consistently communicated, the timing of lift-off will
depend on how the economic outlook evolves. As I have discussed, the
labor market has improved substantially and I expect to see inflation
begin to firm later this year. If this labor market improvement
continues and the FOMC is reasonably confident that inflation will move
back to our 2 percent objective over the medium-term, then it would be
appropriate to begin to normalize interest rates. At the March meeting,
the FOMC removed language from the statement that indicated that we
would be patient in beginning the process of normalizing monetary
policy. But, as Chair Yellen remarked in her most recent press
conference, removal of “patient” from the statement does not indicate
that we will be “impatient” to begin to normalize monetary policy.
Rather, the timing of normalization will be data dependent and remains
uncertain because the future evolution of the economy cannot be fully
anticipated.
Whenever the data support a decision to
lift off, I think it is important to recognize what this would signify.
It does not mean that monetary policy will be tight. We will simply be
moving from an extremely accommodative monetary policy to one that is
slightly less so. It also will be a positive signal about the progress
we have made in restoring the economy to health. In my view, it would
be a cause for celebration, because it would signal that the FOMC
believes that slightly higher short-term interest rates are consistent
with its objectives of maximum employment and price stability.
Near-zero short-term interest rates and a larger Federal Reserve balance
sheet were designed to be a temporary extraordinary treatment to help
the economy regain its vitality, and not a permanent palliative.
How
high will short-term rates ultimately need to go? I think this issue
is very difficult to judge for a number of reasons. First, it depends
on how financial market conditions evolve in response to our monetary
policy adjustments. Second, it depends on other factors, such as real
potential GDP growth, which, in turn, depends on the growth rates of the
labor force and of productivity. My current thinking is that the
long-run nominal federal funds rate consistent with 2 percent inflation
is somewhat lower than in the past. My point estimate is 3½ percent,
but I wouldn’t bet the farm on this. I have considerable uncertainty
about this estimate.
Key Sentence
" Whenever the data support a decision to lift off, I think it is
important to recognize what this would signify. It does not mean that
monetary policy will be tight. We will simply be moving from an
extremely accommodative monetary policy to one that is slightly less so."
Outlook Brighter
Flashback December 2: New York Fed President William Dudley says " Dreary Days for U.S. Economy May Be Over".
Despite some headwinds, Dudley
is optimistic that America could grow closer to 2.5% to 3% in the
coming year instead of the ho-hum 2% growth that has been a hangover of
the Great Recession.
"The U.S. economic outlook looks brighter, with growth likely to be
somewhat above the trend of the past five years," Dudley said in a
speech on Monday
In fact, Dudley thinks the economy could soon be healthy enough for the central bank to lift interest rates off the ground.
He's signaling the Fed will likely be able to raise interest rates in 2015.
"While raising interest rates is often portrayed as a difficult task for
central bankers, in fact, given the events since the onset of the
financial crisis, it would be a development to be truly excited about,"
Dudley said.
"When the [Fed] begins to raise its federal funds rate target, this
would indicate that the U.S. economy is finally getting healthier," he
explained.
In response, I commented Fed Governor Dudley "U.S. Economic Outlook Looks Brighter"; Ring! Ring! Goes the Bell: " Fed Governors tend to be among the best contrary indicators you can find, so much so that I have to wonder if a bell just rang. William Dudley is ready to sell. But I ain't buyin' it."
Dudley On the Economy
In spite of his brighter outlook about which he is now uncertain, Dudly only wants to go from an " extremely accommodative monetary policy to one that is slightly less so," precisely the cue the market was seeking.
One of these lovie-dovie speeches will be a major sell signal, but the Wall Street salivating dogs won't recognize it when it happens. Perhaps no one will.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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