Friday, March 15, 2013
The Federal Reserve has a dual mandate - to ensure that prices
remain stable and for the economy create plenty of jobs.
Reconciling these two goals, however, is typically not easy
because more jobs can lead to pricing pressures in the economy.
But we are nowhere near those levels at present given how high
unemployment is. This morning's February inflation data looks a
bit 'hot,' but that's primarily due to elevated gasoline prices
last month that have started come down this month already. This
means that the Fed does not need to change its current easy-money
stance on inflation grounds.
But while inflation may not be an issue for the Fed, growth in
the economy could be. Recent data on the growth front, such as
retail sales, non-farm payrolls, jobless claims and the ISM
surveys, has been fairly encouraging. The Empire State
manufacturing survey that came out this morning and the
Industrial Production data coming out a little later provide
further confirmation of this trend.
As a result, estimates for first quarter GDP have started
going up in recent days despite the apparent drag from fiscal
austerity. If this trend remains in place over the coming months,
then investors will justifiably start worrying about the course
of monetary policy.
We are unlikely to see any evidence of change to the Fed's policy
stance, particularly on the QE program, in next week's FOMC
meeting. But the accompanying economic forecasts from FOMC
members and the Bernanke press conference would potentially give
us clues to how the Fed sees the evolving economic landscape.
But the market could get ahead of the Fed once it factors in
the necessary ingredients of the economic picture. Yields on
treasury instruments have been creeping up a bit lately, but we
are definitely not there yet. It will take us more than a couple
of months of strong data to reach that point.
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Keep in mind that we started the last couple of years with
similar-looking positive momentum in the economy and the market,
that proved hard to sustain beyond the Spring months. The
improving housing trend is the new element this year, but
it may be premature to buy into the optimistic narrative.
Director of Research