What Data is the Fed Watching?

Tuesday, December 13, 2005 | 01:36 PM

It is a fait accompli that today’s Fed meeting will raise rates a quarter point. The more important question is “How many more increases are we likely to see in the New Year?” In order to determine that, we need to know a few things: Why the Fed is raising rates, what their goal is, and what data they are watching.

If we take the Fed’s own comments at face value, we can eliminate “popping a Real Estate bubble” as the goal. Fed Chair Greenspan has repeatedly claimed that it is all but impossible to identify a bubble in real time, and besides, it is easier to clean one up afterwards than to prevent one. While each of these premises may be (arguably) false, that is what the Fed is on record as saying. Therefore, believing their words, we must accept that targeting the frothy Real Estate Market is not the Fed’s primary goal.

Eliminating the bubble rationale leaves 2 key issues: Price Stability, and Wages & Employment. As its been long apparent to everyone ‘cept most Wall Street economists, Inflation has been robust, due to commodity demand. That’s reflected in the actual price data of nearly everything (except income). Fools be warned: we reiterate our belief that the “Core Rate” is the greatest sucker play in all of economic data.

That leaves Wage Pressure and Employment as the other key issue. And as noted, Wage pressure is nonexistent. Real income has been negative for most of the year. That’s not the reason the Fed is tightening monetary policy.

Nor is job creation a basis for reducing accommodation. Despite rumors to the contrary, this has been an extremely poor job creation cycle, post-recession. There’s much less to the 4.4 million new jobs touted by Treasury Sec’y Snow than meets the eye. That’s a peak to trough number; measured from either the end of the recession or the start of the President’s 1st term, we get a 1.8 million number. Even the 4.4m number contains about 37% projected birth/death adjustments - an unusually high amount of the total. And we have seen an unusually large number of jobs created by Uncle Sam, rather than the private sector. Beyond the mere numbers, we see the quality of jobs created is much worse than the jobs previously lost, paying lower wages and less benefits.

While the Employment data is generally discouraging, the good news is the abysmal job growth leaves the Fed with options. There is utterly nothing in the income or employment data forcing the Fed to keep tightening. It remains a story of inflation, and nothing else.

We have never felt it is the responsibility of Wall Street Economists or Strategists to “advise” the Fed as to what to do; instead, we feel it is more advantageous to analyze their actions and what they may be basing them upon.

Tuesday, December 13, 2005 | 01:36 PM | Permalink | Comments (4) | TrackBack (1)
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Tracked on Jan 6, 2006 3:05:59 PM


The FOMC must "invest" in rate hikes the same way you should invest in stocks. You should not buy a stock because it made money last year but because you believe it will make money next year. The FOMC is looking at where we are in the business cycle and where we will be next year without rate increases.

The economy is not overheated. There are a few areas where capacity utilization is too high but these are few and far between; not much outside of energy, speculation is driving the price of Gold.

However, the backlog of durable goods orders is growing. Billion dollar projects are getting underway all around the world. The US economy is set to enter a boom phase. It is appropriate for the FOMC to get to neutral but the FOMC is currently like a rodeo cowboy with his rope and horse chasing a steer. Neutral is that point of intersection where the cowboy ropes the steer.

Not even the FOMC knows where neutral is; partly because the FOMC is only one of several hundred cowboys chasing the same steer. In recent weeks, rate increases have been posted by Central Banks from Canada to New Zealand. Mexico is perhaps the only country to lower rates in recent months. Even the sluggish Euroland has seen one rate increase.

The obsession with the FOMC is remarkable. The FOMC has a job to do. The evidence is that monetary skills have gradually improved for centuries. We do not have the panics or depressions today as we had in day’s gone bye.

John Law showed the world how to deflate a currency around 1750. All in all, Greenspan and company have done a great job. The business cycle is now an 8 or 9 year cycle. The mid cycle dips are no big deal. Some might prefer the more violent half point moves of prior years but the gradual .25% moves are just what our economy needs.

Posted by: Jack K. Miller | Dec 13, 2005 2:08:07 PM

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