Wednesday, December 5, 2007

The Quick Evolution of FedSpeak

Here's a brief summary of FedSpeak since my last post on Nov 11th. Hawkish comments in black, dovish in green, and labor market concerns in red. Notice the trend?

Fisher (11/14/07): My soundings find no appreciable, let alone debilitating, signs of spillover into the rest of the economy as yet. ...before each FOMC meeting, I consult 35 CEOs from a broad range of businesses, and with the exception of homebuilders, not a single one of them feels the economy is at risk of falling off the table. ...[T]here appears to be some uncertainty about whether we will continue to see inflation slowing... we foresee a risk of a more pernicious pass-through effect than we saw in the recent price increases of underlying commodities.

Hoenig (11/15/07): I think the effects of the financial market disruptions are unlikely to spread very far....
Despite these recent favorable trends, though, upside risks to inflation remain. In addition, we have seen a gradual up-creep in some measures of longer-term inflation expectations.

Kroszner (11/16/07): [T]he economy seems poised to grow for a while at a noticeably slower pace than it did during the summer.... A sequence of data releases consistent with the rough patch for economic activity that I expect in coming months would not, by themselves, suggest to me that the current stance of monetary policy is inappropriate.

Oct 31 Minutes (11/20/07): Participants were concerned about the possibility for adverse feedbacks in which economic weakness could lead to further tightening in credit conditions, which could in turn slow the economy further. ... But participants also noted that in recent decades, the U.S. economy had proved quite resilient to episodes of financial distress, suggesting that the adverse effects of financial developments on economic activity outside of the housing sector could prove to be more modest than anticipated.

Evans (11/27/07): Over the past four months, job growth has averaged about 115,000 per month, ... in line with demographic trends and an economy growing at potential. This is a key fundamental supporting the forecast because gains in employment lead to gains in income, which in turn support gains in consumer spending going forward. [...] With no appreciable slack in resource markets, cost pressures from higher unit labor costs, energy, or import prices could show through to the top-line inflation numbers.

Plosser (11/27/07): Arbitrarily lowering interest rates or providing liquidity to the market does not provide the answers the market seeks. Indeed, in some circumstances, lowering interest rates may prolong the painful process of price discovery. Moreover, a lower funds rate creates a risk that inflation may be exacerbated and inflationary expectations may begin to rise. ... The rise in oil prices and the simultaneous increases in a broader basket of commodity prices suggest that significant inflationary pressures exist....

Kohn (11/28/07): Some broader repricing of risk is not surprising or unwelcome in the wake of unusually thin rewards for risk taking in several types of credit over recent years. And such a repricing in the form of wider spreads and tighter credit standards at banks and other lenders would make some types of credit more expensive and discourage some spending, developments that would require offsetting policy actions, other things being equal....
[T]he increased turbulence of recent weeks partly reversed some of the improvement in market functioning over the late part of September and in October. Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses. Heightened concerns about larger losses at financial institutions now reflected in various markets have depressed equity prices and could induce more intermediaries to adopt a more defensive posture in granting credit, not only for house purchases, but for other uses a well.

Bernanke (11/29/07): We will have the labor market report for November next week, and in the coming days we will continue to draw on anecdotal reports, surveys, and other sources of information about employment and wages. Continued good performance by the labor market is important for maintaining the economic expansion, as growth in earnings helps to underpin household spending.
[T]he outlook has also been importantly affected over the past month by renewed turbulence in financial markets, which has partially reversed the improvement that occurred in September and October. ... These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors.

Mishkin (11/29/07): The near-term path of interest rates is highly uncertain and depends on the implications of the incoming data, which in some cases are evolving right up to the time of the meeting. What is more certain--and far more important--is the commitment of the FOMC to move interest rates as needed to foster outcomes consistent with our dual mandate of maximum sustainable employment and price stability.

Yellen (12/03/07): I expected ... that by now there would have been a noticeable improvement in financial conditions.... [S]ince the October meeting market conditions have deteriorated again, and indications of heightened risk-aversion continue to abound both here and abroad.
Moreover, we face a risk that the problems in the housing market could spill over to personal consumption expenditures in a bigger way than has thus far been evident in the data. This is a significant risk since personal consumption accounts for about 70 percent of real GDP.
Moreover, there are significant downside risks to this projection. Recent data on personal consumption expenditures and retail sales ... have begun to show a significant deceleration—more than was expected—and consumer confidence has plummeted.
There are some significant areas of strength. In particular, labor markets have been fairly robust in recent months. As I mentioned before, the growth of jobs is an important element in generating the expansion of personal income needed to support consumption spending, which is a key factor for the overall health of the economy.
Fittingly, over the last month we've gone from the black of Halloween to the red and green of Christmas. That means we should be getting a Christmas present from the FOMC in the form of a rate cut. How big? The November non-farm payroll report on Friday should tell us. Stay tuned.