Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Sunday, January 22, 2006

Tim Duy: The Fed Is Likely to Keep Raising Interest Rates for a Little While More

Tim Duy watches the Fed, and forecasts a yield curve inversion:

Economist's View: Fed Watch: Ready to Invert: I had previously believed that the Fed would not purposefully invert the yield curve (in this case, the spread between the 10 year and the Fed Funds rates). I had thought that whatever economic environment would drive tighter Fed policy would drive long rates higher. But it looks like inversion day is coming, barring some near term changes in the bond market. Moreover, the Fed looks to be sending a very specific signal: Even if we do pause at the March meeting, our bias remains tilted toward [fighting] inflation. A solid economy and rising energy prices means it is too early to call off the dogs. In my opinion, policymakers... are signaling that without a more dramatic change in the economic environment, the odds remain tilted toward more tightening in the post-Greenspan era....

The Beige Book was, in my opinion, somewhat hard to get a handle on. Mixed messages were common, leaving open the possibility of cherry picking little bits and pieces to support whatever story you want to tell. With that in mind, I concluded that the anecdotal message was that despite some cooling in housing and consumer spending, economic activity continued its solid expansion. And while prices pressures remain contained, there are enough signals of potential inflationary pressures to keep policymakers on their toes.... What about the labor side of the equation? Here it is worth repeating the relevant section from the Beige Book overview:

Most Districts reported signs of continued, if generally moderate, increases in employment. Cleveland, Minneapolis, and Richmond all cited moderate employment gains, with Richmond noting that its rate represented a slowdown. New York, Atlanta, Kansas City, and Dallas reported evidence of stronger employment growth. However, Boston noted that output growth had generally not translated into higher employment, while St. Louis reported a widely mixed pattern of layoffs and hiring. Hiring at financial and legal services firms is boosting the New York District's employment growth, although New York also reported some hiring in manufacturing. Atlanta reported strong demand for both skilled and unskilled labor, in part boosted by storm-recovery efforts. Atlanta reported several locations with tight labor market conditions, while Boston, New York, Philadelphia, Chicago, Kansas City, Dallas, and San Francisco all reported specific occupations in which jobs have been difficult to fill. Several of these Districts cited trucking jobs. Skilled construction workers are relatively sought after in Dallas and San Francisco, and skilled manufacturing jobs were mentioned by Boston, Chicago, and Dallas. Atlanta listed a variety of specialties in "extreme shortage." New York and San Francisco noted that finance-industry labor markets were relatively tight. Despite reports of labor market tightness, Boston, Philadelphia, Minneapolis, Kansas City, and San Francisco all noted that wage increases have been generally moderate. However, New York, Chicago, and Dallas all reported some acceleration in compensation.

Mixed messages here....

On, then, to the inflation story. Note that the report on trucking and shipping has the feel of emerging transportation bottlenecks....

Macroblog's [market-derived interest rate] probabilities are pretty accurate (traditionally, we get a new reading on Mondays). Next week another hike [in the Federal Funds rate] looks like a lock, and with policymakers holding the view that the economic is solid and inflation somewhat more likely than not, the risk remains better than even that Bernanke & Cos. first move is another hike. At a minimum, the Fed wants market participants to believe that even if the first Bernanke move is a pause, don't be surprise if a hike does occur at a later meeting. From their perspective, they are not yet seeing conditions that justify sending an all's clear signal. ]

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