Even The Hawks Fall Into Line

The data flow provides little reason for the Fed to change course anytime soon. Housing starts for November came in slightly above expectations:

Permits were also up to a cycle high. Single family permits remain on a clear uptrend with last year’s dip just an unpleasant memory. Will it end anytime soon? Probably not. Yesterday I pointed to favorable demographics for housing. Today George Pearkes argues that housing is “on sale”:

Elsewhere, the nation’s industrial sector rose a better than expected 1.1% in November, propelled higher by manufacturing:

The return of striking GM workers clearly helped the numbers as truck production in particular bounced higher:

Still, it remains notable that despite all the angst of the past year, the weakness in manufacturing remains no worse than that of 2015-6. Note also that even excluding autos, manufacturing output was up 0.3% in November. Signs of stabilization? Reasonable given the Markit PMI numbers. Signs of recovery? Not yet. But again, stabilization is all we need to compare favorably with last year and say the worst is over.

Boston Federal Reserve President Eric Rosengren has an optimistic view of 2020:

My own view is that it is unlikely we will have an economic downturn in the coming year, given the generally positive financial conditions and the continued accommodative monetary and fiscal policies. Of course, this outlook assumes that we do not have a significant negative shock from abroad, or experience a negative shock from a sharp ratcheting up of trade disputes with major trading partners.

and he doesn’t see a reason for the Fed to change rates:

With the recent positive economic news, and with monetary and fiscal policy already accommodative, I see no need to make the current stance of monetary policy more accommodative in the near term. Given that monetary policy works with lags, and Federal Reserve policymakers have already eased monetary policy three times in 2019, my view is that it is appropriate to take a patient approach to considering any policy changes, unless there is a material change to the outlook. 

I guess we should wonder about Rosengren’s definition of the “near term.” Next month? Next quarter? I am thinking the next few quarters. Rosengren probably anticipates one rate hike this year. Still, it seems inconsistent with a serial dissenter who argues:

Since April, the economy has performed pretty much as many professional forecasters expected – this, despite recent concerns with downside risks, notably those associated with slower global growth and uncertainty about trade policy. 

Looks like he has fallen into line with the consensus view that a series of rate cuts were needed to keep the economy humming.

Tomorrow (Wednesday) is a light data day (mortgage applications, oil inventories) but things pick up again Thursday with unemployment claims, Philly Fed index, and existing home sales. None of these are likely to change the underlying narrative; still, the Philly Fed index should help us gauge the temperature of the manufacturing sector. Friday rounds out the week with the final read on third quarter GDP and, more importantly, November consumer spending and PCE inflation data. Also Friday is the final release of the November Michigan consumer sentiment numbers.

Bottom Line: Data stabilizing (manufacturing) to improving (housing) but not enough to prompt the Fed to change course. 

What a Difference a Year Makes: Housing Edition

Late last year a mild panic arose when the housing market hit a bit of a speed bump. Higher interest rates finally made a dent in activity which in turn stoked fears of a sharp downturn and even recession. In some ways, the concern was expected if not even understandable given the memories of the housing crash over a decade again.

Today, the National Association of Home Builders released its confidence measure and one almost wonders what all the fuss was about:

Home builder confidence rebounded to levels last seen in 1999. A good part of the story is the Fed’s pivot to easier policy. Housing is an interest rate sensitive sector of the economy and lower rates reversed the downward momentum as should have been expected.

Demographics is another factor at play. Look for a structural upswing to take hold:

Tuesday AM we see the latest housing starts numbers. Market participants anticipate starts rose to 1.35 million, although of course this is a volatile number. The combination of low interest rates, solid job growth, and a demographic push, however, suggests we should take a weaker than expect number with a grain of salt. The underlying trend looks positive and should ease any residual concerns of impending recession.

The Fed will also deliver the industrial production report for November. Expectations are for a sharp 0.8% gain in activity, but of course this partially reflects a reversal of strike-related weakness in October. Mostly we will be searching through the data for any signs that the sector is stabilizing. Stabilization is all we really need to make the comparisons with 2019 much, much better. And it may be all we can hope for; the Boeing news certainly won’t help the sector.

Also today we get the JOLTS report for October, very interesting if you care about labor market dynamics (don’t we all?) but maybe essentially old news for a market buoyed by the November employment report. Finally, we also get to hear from Boston Federal Reserve President Eric Rosengren. Even though he dissented against this year’s rate cuts, he must have come to a place where he can accept the Fed’s policy path.  After all, almost all FOMC participants expect no policy changes in 2020, and only four see a single rate hike.  No one see a reversal of this year’s cuts as necessary to meet the Fed’s mandates.

Bottom Line: The data has yet to run counter to the Fed’s base case for growth near trend next year. That means a steady Fed remains the most likely outcome for the next few quarters at least.

Fed Leaves Rates Unchanged, Signals Steady Policy in 2020

The outcome of this week’s FOMC meeting largely met my expectations. The Fed left rates unchanged, following through on their signaling from the October meeting. More importantly, this month’s dot-plot indicates that the vast majority of FOMC participants believe rates will remain unchanged in 2020. Barring a dramatic shift in the direction of the economy, the Fed expects they can drift into the background next year and watch their soft-landing play out.

In the FOMC statement, the most notable change was this language in October:

This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.

to this now:

The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.

Critically, the Fed dropped the reference to “uncertainties” in the outlook. This indicates that they are much more confident in the outlook, apparently believing they have now done enough to keep the economy on track. This suggests that the bar to another rate cut has edged higher from last October. They really need a “material” change in the outlook to take rates down another notch.

At the same time, however, the bar to a rate hike is still even higher. The dot-plot revealed that all but four meeting participants expect rates to remain unchanged in 2020; the remaining four expect only a single hike. Remember there was a subset of members opposed to any rate cuts so they would be looking to reverse sooner than later. Overall, there is virtually no expectation that the Fed needs to consider reversing this year’s rate cuts anytime soon. Rate hikes are anticipated in 2021 and beyond, but that is simply too far off to be very relevant at this point. In some sense, this is really just an artifact of the models; given persistently low unemployment, the models will forecast higher rates to stave off inflationary pressures.

Median growth forecasts were unchanged from September as the Fed retains the basic outlook for steady growth near trend. Unemployment forecasts edged down, unsurprisingly given the November employment report. The longer-run estimate of the unemployment rate dropped 0.1 percentage points as persistently low inflation bolsters the Fed’s confidence that estimates of the natural rate of unemployment are still too high. The longer-run estimate of the federal funds rate held at 2.5%; I had though we might see a downward revision.

Powell’s press conference was decidedly dovish. He wants to see persistent and significant inflation before raising rates and reiterated that the labor market can’t really be described as hot unless wage growth accelerates. Basically no indication that he is worried about the economy overheating.

Bottom Line: The Fed did almost exactly as expected this week, offering confidence in the outlook while making clear they had no intention of raising rates in the context of that outlook. To be sure, if conditions change, the Fed will too. But for now they have taken themselves off the table, looking for some well-deserved rest.

Fed Ready to Spread Holiday Cheer

If You Don’t Have Any Time This Morning

Powell & Co. will follow through on their expectation to hold rates steady this month; the outlook has not changed in any material way to induce them to cut rates and a rate hike remains a long way off.

Key Data

The impressive November employment report dominated the news last Friday. Employment grew by a whopping 266k, well above expectations. Returning autoworkers accounted for some of the gain (41k), but that simply offset a loss the previous month. After accounting for upward revisions to previous months, job growth has averaged 205k over the past three months. Not bad for an economy that analysts well over a year ago were saying was about to tip into recession.

Underlying details were solid as well. Hours-worked edged higher while wages continue to grow in the 3.0-3.5% year-over-year range of the past year. The unemployment rate edged back down to 3.5%, well-below a level the Fed believes (believed?) consistent with stable inflation. A slight 0.1 percentage point decline in labor force participation left that series trending near its recent range.

Temporary employment rose; the overall pattern has mirrored the 2015-16 period. Some of the temp help weakness in recent years might (hopefully) be attributable to some supply-side constraints as this is the potential pool of labor I would expect to dry up first with sufficient permanent jobs available. Underemployment measures, however, have yet to uniformly return to pre-recession lows. This suggests the labor market still has room to run.

Manufacturing data earlier in the weak revealed the sector as still weak (ISM) or in the process of bottoming out (PMI); see my thoughts here. The ISM service measure edged down but the internals were generally good with rising new orders and employment components. The service side of the economy continues to hold up despite the softness in manufacturing.


No Fedspeak due to blackout period ahead of this week’s FOMC meeting. Late last week I wrote about Federal Reserve Governor Lael Brainard’s endorsement of yield curve control:

Given the proximity to the effective lower bound for interest rates, the Federal Reserve is looking to bolster its policy arsenal ahead of the next recession. Watch for the “bond traders’ nightmare” of adding yield curve control to the Fed’s toolkit to rise to the top of the list as the policy review draws closer to an end.

For more, please visit Bloomberg Opinion.

Upcoming Data

Per usual, the data flow decelerates a bit in the second week of the month. Highlights for the week include the Consumer Price Index (Wednesday), the Producer Price Index (Thursday), and Retail Sales (Friday), all for November. The late-Thanksgiving holiday may weigh on the Retail Sales numbers – so don’t panic if the number is on the soft side of expectations. The usual initial unemployment claims report comes Thursday. The big event for the week is the Fed meeting, which concludes Wednesday and is followed by Federal Reserve Chair Jerome Powell’s press conference.


Market participants widely expect the Fed to hold rates steady this week, which is exactly what will happen. I think the statement will be little change other than updating the economic review section.More important will be the message delivered via the Summary of Economic Projections and Powell’s press conference. I anticipate a general sense of optimism with some residual concerns about risks to the outlook in the context of an overall dovish policy path.

The base outlook for the economy will likely hold fairly constant with the Fed anticipating the economy will grow near trend through the forecast horizon while inflation gradual returns to 2%. The unemployment forecast should edge down considering solid job growth; unemployment is currently 3.5% while the year-end estimate for the fourth quarter was 3.7% as of last September. More important will be the direction of the longer-run estimates of unemployment. Considering the persistent undershooting of the inflation target, policy makers will likely bring down their estimates of the natural rate of unemployment.

The projected path of interest rates as depicted in the “dot-plot” will edge lower; the dots for 2020 will collapse to a combination of the current level and, I suspect, the 175-200 basis point range. There will be a contingent that anticipates the Fed can begin reversing this year’s rate cuts by the end of next year while of course some participants didn’t approve of recent cuts at all. Watch for downward revisions to the longer-run rate estimate; the events of the past year should make the Fed even more cautious of what I think remains their optimistic estimates of neutral rates.

Powell’s goal will be to deliver an optimistic message while avoiding any hints that policy makers are looking to soon reverse recent rate cuts. The Fed arguably has pulled off a soft-landing for the economy this year and they absolutely do not want to risk that with some premature hawkish talk. Look for Powell to highlight existing risks to the outlook and persistent undershooting of the inflation target as reasons to expect rates will be steady for the foreseeable future. Also expect Powell to express optimism regarding the supply-side response of the labor market; he may also point toward still somewhat-elevated underemployment measures as a reason to think the economy has yet to reach full employment.

Bottom Line: The Fed will gift market participants with a “dovish-hold.”

ISM Offers Few Clues

The ISM manufacturing index edged now from 48.3 in October to 48.1 in November. Considering the monthly volatility, I would characterize the measure as little changed in recent months:
Not enough to conclude neither that manufacturing is firming nor set to deteriorate further. In contrast, the Markit PMI reached a seven-month high in November. So if you are a Markit PMI-truther, you see more evidence that manufacturing has bottomed out. ISM-truthers remain glum. The battle between the two groups rages, not to be resolved until the data break one way or the other. Taking the two together suggests to me that manufacturing is not deteriorating further at this point with possibility that a the sector has reached a cyclical low.

To be sure, President Trump’s predilection for escalating trade disputes remains a risk for the sector. Today he announced a resumption of steel and aluminum tariffs against Brazil and Argentina in response to the depreciation of those currencies against the dollar. Those nations though have gained more from the export of soybeans to China (substituting for US sales) than they loose from the additional metals tariffs.

In addition, the administration has proposed new tariffs on French goods in response to that nation’s tax on digital revenues. Meanwhile, it looks like the trade talks with China are still in limbo. In other words, Trumpian uncertainty with regard to trade remains a risk for manufacturing.

Relatedly, Trump also put additional pressure on Federal Reserve Chair Jerome Powell, declaring the central bank’s policy stance “ridiculous” and the cause of the strong dollar. Trump will get little relief from Powell – the risk of trade related weakness is no longer enough to prompt easier monetary policy, the Fed is looking for a “material” change to the outlook, and the ISM number isn’t providing that.

Bottom Line: Nothing here to change the Fed’s outlook.

Fed Holding Steady For Now

If You Don’t Have Any Time This Morning

The Federal Reserve will hold rates steady at the upcoming December FOMC meeting. At this juncture, they like us remain focused on the data flow. Until the outlook shifts meaningfully one way or the other, the Fed is content to sit on the sidelines.

Key Data

Data remains generally lackluster, disappointing both those still looking for a recession and those hoping for a rapid rebound. Housing remains perhaps the brightest sector as last year’s soft patch is now well in the rearview mirror:

New manufacturing orders continue to move sideways:

While not the most exciting data, the relative strength of new orders stands in stark contrast to the widespread concerns that investment spending by firms would fall off a cliff this year. To be sure, the hangover from the 2018 fiscal stimulus coupled with slower foreign growth and trade policy uncertainty have weighed on investment spending this year. These negative shocks, however, were insufficient to trip the economy into recession or even match the weakness in new orders seen in 2015-16.

Consumer spending growth has moderated back to a pace like that of 2015-16:

That seems like it should not be a surprise. The drop last year and the rebound earlier this year were both obviously noise in the data that had little to do underlying trends.

Inflation continues to track below the Fed’s target:With neither the economy on fire nor inflation rising, the Fed has little reason to turn their attention to reversing this year’s rate cuts anytime soon.


Last week Federal Reserve Chair Jerome Powell provided this year-end assessment of the economy:

We started 2019 with a favorable outlook, and over the year the outlook has changed only modestly in the eyes of many forecasters. For example, in the Survey of Professional Forecasters, the forecast for inflation is a bit lower, but the unemployment forecast is unchanged and the forecast for gross domestic product (GDP) is nearly unchanged.The key to the ongoing favorable outlook is household spending, which represents about 70 percent of the economy and continues to be strong, supported by the healthy job market, rising incomes, and solid consumer confidence.

I am not sure that the “key to the ongoing favorable outlook” is really consumer spending. After a discussion of evolving trends this year, Powell gets to what I think is the more central reason that the economy has held up this year:

To help keep the U.S. economy strong in the face of global developments and to provide some insurance against ongoing risks, we progressively eased the stance of monetary policy over the course of the year.

Going into 2019, the Fed thought that they needed additional rate hikes to slow the economy back to a moderate pace. Had they remained true to that outlook, the results this year would have been very different.

Powell details the slower global growth and rising trade risks that help to prompt the Fed dovish pivot. Additionally, he notes:

Since the end of last year, incoming data—especially muted inflation data—prompted analysts inside and outside the Fed to again revise down their estimates of r* and u*.4 Taken at face value, a lower r* would suggest that monetary policy is providing somewhat less support for employment and inflation than previously believed, and the fall in u* would suggest that the labor market was less tight than believed.

We should continue to watch for estimates of u* in particular to be revised lower in light of continued sub-par inflation outcomes.Powell also highlights the benefits of low unemployment for the labor market in general:

Many people at our Fed Listens events have told us that this long expansion is now benefiting low- and middle-income communities to a degree that has not been felt for many years. We have heard about companies, communities, and schools working together to help employees build skills—and of employers working creatively to structure jobs so that employees can do their jobs while coping with the demands of family and life beyond the workplace. We have heard that many people who in the past struggled to stay in the workforce are now working and adding new and better chapters to their lives.

The Fed in general, and it seems Powell in particular, has clearly had an epiphany regarding the benefits of persistently low unemployment.In prior cycles central bankers would be looking upon sub-4% unemployment rates with much more suspicion as a warning sign that inflation will soon be on the rise. The shift has substantial implications for policy; the Fed views the costs of high unemployment as sufficiently high relative to those of the risk of inflation at these levels that they very much err against the possibility of recession. This in turn lessens the possibility that Fed action or inaction helps trip the economy into recession and brightens the near- to medium-term outlooks.

Upcoming Data

We have an important week of data ahead of us.It begins with the ISM and Market PMIs on Monday. Market participants are looking for signals from the ISM data that the manufacturing downturn is bottoming out, essentially confirming the story from the flash Markit PMI. Stabilization of the ISM data would be the final blow to the past year’s fears fanned by the recessionistas.On Wednesday we get the service sector versions of these reports; the expectation is that the service sector data also firms, recognizing of course that the sector overall has largely shrugged off the manufacturing weakness. Also Wednesday comes the ADP employment report to heighten our anticipation of the Friday release of the November employment report. There we will look for any signs that the labor market is cooling; the initial claims data suggests that the labor market momentum remains fairly steady. On Thursday we get the usual initial unemployment claims release as well as the international trade data for October.


The minutes of the October Federal Open Market Committee meeting made clear that the Fed is done reacting to the risk of economic weakness. With three rates now the rearview mirror, Federal Reserve Chair Jerome Powell and his colleagues shifted into a new phase in this cycle, now carefully watching the data for signs that the risks to the outlook are becoming a reality beyond what we have seen this year.

For now, this means that the Fed will remain on hold until they see a substantial change in the forecast. Still, considering the central bankers remain wary of potential downsides to their generally optimistic forecast, the balance of risks remains weighed toward another rate cut in the months ahead.

Last month’s rate cut was anything but a unanimous decision. Although “many” participants favored a more accommodative policy stance, “some” preferred to hold steady at this meeting. And even among the more dovish group there was little appetite to consider further rate cuts. Consequently, committee members choose to strike the “act as appropriate” language from FOMC statement with the intention of signaling that they expected to hold rates at the current level barring a “material reassessment of the economic outlook.”

This policy position basically takes December and likely January rate cuts off the table. To be sure, policy remains data dependent and hence is not on a preset path. Realistically though, it seems unlikely that enough data will emerge in the next several to justify a substantial change in the Fed’s forecast for the worse. And if manufacturing looks to be stabilizing in this week’s data, the most likely direction is for upward adjustments to the outlook.

At this point, fourth quarter GDP growth looks to be coming in just below trend growth; the current Atlanta Fed estimate is 1.7%. That kind of number is not going to lead to material reassessment of the outlook.Indeed, even if the number comes in on the weaker side, there is simply too much quarterly variability in GDP numbers to justify such a shift. Instead, the Fed will be looking for signs that such weakness would persist beyond one quarter and push unemployment rates higher before making an assessment in favor of easier policy (and hence why the employment reports are so important). It will take some time for such data to emerge. That makes a policy change in the near term unlikely.

That said, even if the bar to a policy change is high, balance of risks to that forecast remains on the side of additional easing.First, for all intents and purposes, Powell made clear in his post-FOMC press conference that only evident inflationary pressure would justify a rate hike and we are a long way from that point so we know the risks are not balanced in that direction. Second, the Fed retains enough concerns about the forecast that even though they don’t expect to cut rates again, the doves that drove this last rate cut must still be wary that another is needed.

The minutes identify a number of potential issues such as further downside risk for global growth and trade developments and the persistence of low inflation. Moreover, a few participants reminded the committee that policy rates remain near the effective lower bound. At the currently, policy makers will tend toward moving aggressively should the data soften because the costs of delay and falling back to zero are so high. In fact, it may be that this concern will ultimately lead the Fed to require a lower bar for another rate cut than suggested by the minutes.

Bottom Line: Fed is hoping that they have done enough to ensure a soft-landing for the economy. Given how much easing is already in place and the current condition of the economy, they anticipate that rates will hold steady deep into 2020. I suspect it would take at least that long before conditions changed sufficiently in a positive direction to lead them to consider unwinding rate cuts. But in the near term, the Fed still retains a dovish bias and hence the risks remain slightly tilted toward additional cuts.