Wednesday, May 10, 2017

The Fed Is on the Right Side of Its 'Transitory' Bet

Despite the soft first-quarter economic data, investors should expect another interest-rate increase in June.

"The Federal Reserve receives a lot of criticism for the way it conducts monetary policy, but it shouldn’t be faulted for delivering a hawkish message at last week’s policy meeting in the face of data showing a marked slowdown in first-quarter growth. The May meeting came off largely as expected, with policy makers leaving interest rates unchanged and the post-meeting statement containing a clear message that policy makers remained set on a June rate hike.
The Fed is betting that residual seasonal adjustment issues negatively impacted the first-quarter gross domestic product and that the data does not reflect the true pace of economic growth. If they are correct, then the pace will pick up over the next two months and they will likely hike rates in June. But if second-quarter data shapes up like the first, they may decide they have overreached in their policy expectations once again. And so far it looks like the Fed is on the right side of their bet. The employment report for April reveals solid job growth and low unemployment as the economy charged into the second quarter.
The hypothesis underlying the Fed’s decision is that the process used by the Bureau of Economic Analysis -- the agency responsible for the GDP report -- for computing the data leaves behind some seasonal effects that were supposed to be removed statistically. This causes the reported data to be low in the first quarter relative to the actual performance of the economy. This makes an already possibly volatile number even more difficult to interpret." 
What you guys think about the data in comparison to real life situation? Has the magical capitalism restored in the States after the 2008 crisis?


  1. From a strict monetary policy standpoint, that sounds accurate. If your econometrics are finding that you have residuals left in the estimates from seasonal effects that you aren't removing, you are right in acting on the data and raising rates.

    What always makes me nervous about monetary policy reports is that they don't necessarily take into account the overall health of the economy. Gordon talked about measurement errors in his book, as well as the risk of not looking at the whole picture. It is something him and Kwak had in common in their writing. Signs point to a bloated Lorentz curve reflecting growing inequality in the U.S. economy, and this is probably related to the quality of employment at lower income levels (something Gordon addressed).

    While the Fed is probably right, I don't think the decision reflects a return to capitalism as usual in the United States. It has been the imperative of the Fed since Volker to control interest rates, and the movement of the interest rates is going to be influenced by the movements of the financial sector, which has thrived since the recession while leaving much of the rest of the economy to languish in low-quality jobs that are nevertheless considered signs of progress.

  2. I agree with Ryan, the fed is probably right with their decision. Based off of the employment reports in April, we are seeing job growth and low unemployment.