Grand Central: Is the Fed Data Dependent and Does the Market Believe It? – Real Time Economics

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HILSENRATH’S TAKE: Is the Fed Data Dependent and Does the Market Believe It?

Federal Reserve officials say their policy is data dependent, meaning if the economy performs in a way that veers from their expectations, their policy will change too. If inflation or hiring run hotter than expected, interest rate policy will be more restrictive than otherwise planned, and if inflation or hiring run cooler, interest run policy will run looser.

Recent market behavior begs some questions: Is the market data dependent too? Do investors believe the Fed is as data dependent as officials say?

The market’s reaction to the last two monthly jobs reports released by the Labor Department is a case study. The May employment report released Friday showed monthly job growth averaged 250,000 per month in April and May, a pickup from average monthly growth of 195,000 originally reported for the two previous months.  Meantime the unemployment rate has fallen to 6.3% in April and May from 6.7% in March.

All else being equal, one might think that a data-dependent Fed would respond to these encouraging jobs reports with at least a slightly more restrictive monetary policy in mind data. But investors don’t seem to think so. Yields on 10-year U.S. Treasury bonds have fallen to 2.60% from 2.75% in early April. Yields on one-year notes have edged down to a little over 0.09% from a little over 0.11% in early April. Yields on two year notes have inched to 0.40% from 0.43%. In fed funds futures markets, expectations for Fed rate hikes have diminished since early April.

There are different explanations for this dichotomy: 1) All else isn’t equal. For instance, the European Central Bank has launched aggressive new easing measures in response to very low inflation. That is perhaps creating a gravitational pull on rates across the board in the U.S., even though the U.S. job market seems to be improving. 2) Investors are sniffing out trouble for the U.S. economy that isn’t yet apparent in the jobs data. 3) Rates were priced too high to begin with a couple of months ago. 4) Investors are putting more weight on the Fed’s assurances that rates will stay low in the future than on its caveat that its plans are subject to change depending on the data.

If it is the latter, if the Fed really is going to be data dependent and if the economy really is strengthening, then bond investors could be heading for unpleasantness.

-By Jon Hilsenrath



China’s Central Bank is Prevailing in Policy Battles Over China’s Economic Future.  The People’s Bank of China is turning into a policy heavyweight in a battle among the country’s top economic authorities over how to fuel growth without piling on excessive debt. The government has sought to portray a united front on its “mini-stimulus” measures, or small adjustments to monetary policy to bolster growth. Behind the scenes, however, China’s biggest economic agencies—the People’s Bank of China, the Ministry of Finance, the state planning commission and other financial regulators—have fought over whether more should be done to bolster growth, such as cutting interest rates for the first time in two years, according to officials familiar with the government’s deliberations.

PBOC Vice Governor’s Star Rises. Yi Gang, a vice governor at China’s central bank who is in charge of managing the country’s nearly $4 trillion in foreign-exchange reserves, has quietly been named a senior official in the Communist Party’s top economic advisory group–a body akin to the White House’s National Economic Council, according to officials with knowledge of the matter.

China Exports Strengthen With 7% Climb. China posted solid export gains in May, pointing to improving global demand for the nation’s goods and providing a bright spot in the outlook for the world’s second largest economy. But surprisingly weak imports in the same month raised concerns over domestic demand, suggesting that the economy isn’t out of the woods after its sluggish growth early this year.

Most U.S. Economists Surveyed Predict a Debt Crisis in China. A little more than half of U.S. business economists think China is headed toward a debt crisis in the coming years, according to a new survey released Monday by the National Association for Business Economics.

Gov. Kuroda Minces Few Words on Past BOJ Mistakes. At a conference Saturday, Bank of Japan Gov. Haruhiko Kuroda said the BOJ’s 2006 decision to lift its easing program was “somewhat premature.”Mr. Kuroda went on to say the end to the easing became a reason why the BOJ has been unable to gain full credibility as a deflation fighter. His comments suggest the BOJ will be in no rush to consider an exit to its current policy.

Jobs Report Likely to Intensify Fed’s Debate on Rate-hike Timing. Friday’s jobs report should reassure Federal Reserve officials the economy is improving as they have predicted and it could intensify their debate about when to start raising short-term interest rates.Fed officials have encouraged a view in financial markets that they won’t start raising rates from near zero until mid-2015. But a swift decline in the jobless rate in recent months means slack in the labor market might be diminishing a bit faster than officials expected, a possible source of higher inflation in the future and of tension inside the Fed as officials consider how long to wait on raising rates.

Jobs Report Shows Steady Gains in Labor-Market Recovery. The U.S. economy added 217,000 jobs in May, providing renewed evidence that the five-year-long recovery accelerated this spring. U.S. payrolls reached 138.5 million, exceeding the country’s previous peak level of employment set in January 2008.

ICYMI: The Journal’s Jon Hilsenrath and Sudeep Reddy discussed what Friday’s jobs report will mean for the Federal Reserve in a video Spreecast.

Fed Names New Director of Consumer and Community Affairs. The Fed on Friday said Eric Belsky will be the new director of its consumer and community affairs division. Mr. Belsky, who is now managing director of the Joint Center for Housing Studies at Harvard University, is expected to start his new job in August.

ECB to Markets: Chill a While and Let Our Actions Take Effect. The common message for financial markets from European Central Bank officials on Friday, a day after the bank unveiled a package of easing measures: we’ve done a lot; we’re open to doing more; but chill out for a while and check back in with us later in the year to see if more is required.

ECB’s Monetary Measures Unlikely to Tame Strong Euro. The market reaction to the ECB’s easing measures suggests the central bank will have a tough time denting the persistently strong euro — a key contributor to sluggish price growth in the euro zone.

Deflation Already Hitting Some Euro-zone Countries. Deflation poses a threat to the fragile recovery across the 18-nation euro zone. But it has already taken hold in Portugal, Greece, Cyprus and Slovakia in recent months.

German Media Slam ECB Rate Move. For the German media, the ECB’s rate cut announcement was part monetary policy, part horror movie.

Here’s One Set of Potential Losers from the ECB’s Rate Move. European money market funds, which have been pushing into riskier strategies to stem outflows, may be among the big losers now that the ECB has cut interest rates to negative territory.

ECB’s Coene: Low Inflation Can Turn Into Deflation Very Quickly. Low inflation can turn into deflation very quickly, which is why the ECB took an extra raft of measures to deal with this risk at its meeting in Frankfurt, Governing Council member Luc Coene said Friday. “We’re not yet in a deflationary situation…but the movement from a low-inflation to a deflationary situation can happen very quickly.”

ECB’s Nowotny: ECB Has Done What it Can From a Monetary Policy Viewpoint. The ECB has done everything it can do to encourage growth in the euro zone and that further rate cuts are unlikely, Governing Council member Ewald Nowotny said Friday. “I do believe that for the foreseeable future interest rates have reached the quasi lower limit.” –Dow Jones Newswires

ECB’s Constancio: Stress Tests Will Ensure Banks Can Use New Funds. An imminent health check of euro-zone banks will pave the way for lenders to use the ECB’s new funds earmarked for financing lending, ECB Vice President Vitor Constancio said Friday. He said stress tests scheduled for autumn should ensure banks have cleaned up their balance sheets sufficiently to make use of new facilities announced last week. –Dow Jones Newswires

Denmark’s Central Bank Leaves Interest Rates Unchanged. Denmark’s central bank on Friday declined to follow the ECB’s lead and left its interest rates unchanged.

German Central Bank Lifts Economic Growth Projection. Germany’s central bank raised its 2014 growth forecast for Europe’s largest economy, citing stronger domestic demand, but lowered its forecast for inflation amid persistently weak prices in the euro zone.

Germany Grapples With Growing Shortage of Skilled Labor. For German executives, Europe’s unemployment and weak economy are distant problems. The country’s statistics office said Friday the country posted its 17th straight quarter of rising labor costs. The data underscore a costly and growing shortage of skilled labor, and the trend further squeezes competitiveness in Europe’s export powerhouse, already burdened by a strong euro.

Bank of Mexico Surprises with Interest Rate Cut. The Bank of Mexico unexpectedly cut its benchmark lending rate by half of a percentage point Friday to a record-low 3% to help jump-start an economy that has failed to recover so far this year. It was the central bank’s first rate cut since October.


It’s taking longer and longer for the U.S. job market to recover from recessions. Nonfarm payrolls hit their previous peak in May, but the recovery took longer than in 2001. And in 2001 it took longer than in the 1990s, which in turn took longer than in the 1980s.




-ECB’s Noyer speaks at 9:00 a.m. EDT (1300 GMT) at an International Economic Forum of the Americas conference in Montreal

-St. Louis Fed’s Bullard speaks on the economy and monetary policy at 9:10 a.m. EDT in Palm Beach, Fla.

-Fed’s Tarullo speaks on corporate governance at regulated institutions at 12:45 p.m. EDT in Washington

-Boston Fed’s Rosengren speaks at 1:30 p.m. EDT at the Banco de Guatemala in Guatemala City



-ECB’s Liikanen speaks at 0800 GMT in Helsinki

-ECB’s Makuch speaks at 1100 GMT in Bratislava

-ECB’s Coeure speaks at 1115 GMT in Frankfurt

-ECB’s Mersch speaks at 1400 GMT in Brussels



-ECB’s Mersch speaks at 0815 GMT in Barcelona

-National Bank of Hungary at 1200 GMT releases minutes from its May 27 policy meeting

-Central Bank of Iceland issues policy decision



-ECB’s Jazbec speaks at 1230 GMT in Dubrovnik

-ECB’s Weidmann speaks at 1800 GMT in Dubrovnik

-BOE’s Carney speaks at 2000 GMT at the annual Bankers and Merchants dinner at Mansion House in London

-Reserve Bank of New Zealand issues policy statement

-Indonesia’s central bank issues policy statement

-Bank of Korea issues policy statement

-National Bank of Serbia issues policy statement

-Central Reserve Bank of Peru issues policy statement

-Bank of Japan issues policy statement

-ECB’s Coeure speaks at 1230 GMT in Dubrovnik


Friday’s job report validates the Fed’s strategy of watching a wide variety of labor-market indicators and not focusing solely on the unemployment rates, writes Mohamed El-Erian at BloombergView. “Once again, and despite the solid job creation, earnings growth remains anemic. As such, it is hard to make a strong case that the labor market is getting too tight overall. There are more jobs to be gained before the natural rate becomes a binding constraint, and before the current monetary policy stance goes from being economically enabling to disruptive.”

Josh Bivens writes for the Wall Street Journal that he isn’t worried rising labor costs will spark a rise in U.S. inflation. “Not only has there been no hint of rising labor costs yet in the recovery, but there is also a large buffer standing between labor-cost growth and overall inflation – a buffer provided by the historically rapid growth of profits that could absorb any inflationary pressure spurred by rising labor costs.”

John Coates writes in the New York Times that, “Over the past 20 years the Fed may have perfected the art of reassuring the markets, but it has lost the power to scare. And that means stock markets more easily overshoot, and then collapse. The Fed could dampen this cycle. It has, in interest rate policy, not one tool but two: the level of rates and the uncertainty of rates. Given the sensitivity of risk preferences to uncertainty, the Fed could use policy uncertainty and a higher volatility of funds to selectively target risk taking in the financial community.


– The Japanese government on Monday raised its economic growth reading for the first quarter, saying that capital spending was sharply higher than initially thought.

-Canadian employers hired the largest number of part-time workers in almost four years in May, but an influx of job seekers into the labor force pushed the jobless rate up to 7%

-The Russian government expects consumer price inflation will rise 8% on the year in June, after previously estimating annual inflation in 2014 would be no more than 6.5% -Dow Jones Newswires

-Brazilian monthly consumer prices slowed in May versus the previous month, but not as much as expected — rising 0.46% after a 0.67% rise in April -Dow Jones Newswires

-The Greek economy contracted by 0.9% in the first quarter, performing slightly better than previously forecast, the Greek statistics agency said Friday

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9 June 2014 | 11:34 am – Source:

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