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The Fed’s Complete Taper Timeline

The Fed’s Complete Taper Timeline

Commenting on the Fed’s recent communications debacle, Bank of America economist Michelle Meyer writes that the Fed was getting high marks for its communication "up until the last meeting where the message…

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The Fed's Complete Taper Timeline

Commenting on the Fed's recent communications debacle, Bank of America economist Michelle Meyer writes that the Fed was getting high marks for its communication "up until the last meeting where the message got jumbled." Specifically, in light of the stunned market reaction following the last meeting, many commentators declared that the Fed had abandoned Flexible Average Inflation Targeting (FAIT), which Meyer strongly disagree with, conceding that while a growing number of Fed officials have become uncomfortable with rising inflation and are looking to remove accommodation faster, the reality is that Chair Powell and the majority of the Committee have not given up on FAIT. Indeed, Meyer notes, "the gut reaction of the markets pulling forward rates hikes to 4Q 22 following the last meeting proved fleeting as the market has subsequently pushed out the first hike back to 1Q23."

To help navigate the Fed's communication error, Meyer provides a guide for understanding the Fed’s (latest) reaction function and communication.

First, the Taper

Here Chair Powell has been crystal clear: the Fed will slowly guide the markets toward the taper. BofA shows the taper timeline in the chart below, with its expectations overlaid.

While Meyer concedes that it is possible for the Fed to signal tapering at the upcoming meeting in July, the BofA economist remain doubtful. The reason to wait is that the market isn’t pricing in the announcement at this meeting, and the Fed wouldn’t want to risk surprising the market. In the last meeting, Powell stated that taper was still “a ways away”. But on the other hand, they have been providing hints that an earlier move is possible, and the surprise will be minimal. Financial conditions are also very accommodative with yields significantly lower making it less painful if rates reset higher upon a taper announcement. Combining these two, BofA thinks it is much more likely that they signal in September.

There is also a risk of the Fed pulling forward the actual taper from BofA's current forecast of January to perhaps December or even November. This depends on how much quantitative guidance the Fed offers along with the taper signal. According to Meyer, if the Fed is clear that they want to see a certain amount of job creation in order to taper - such as a range for the employment-to-population ratio or progress on the jobs deficit - it will be easier to wait to execute taper. Another option would be to offer calendar guidance but this seems to run counter to Powell’s desire for policy to be “outcome based” rather than “outlook based.” If the Fed keeps the language vague arguing for “substantial further progress”, it seems to leave options open.

What about hikes

The Fed laid out the criteria to hike rates as three-fold:

  1. inflation needs to reach 2% and stay there for a year; 
  2. conditions be met to believe that inflation can run moderately above 2% allowing for the overshoot to offset the undershoot;
  3. maximum employment to be met with broad-based labor market recovery.

The first has been satisfied. We are on the way to meeting the second, although doubts remain - especially among the FOMC - given the potential transitory nature of inflation. The third criteria hasn’t been satisfied and also a likely needed for the second to be met.

The challenge, as Meyer explains, with declaring victory on the inflation overshoot is that we are vulnerable to inflation falling back below the target – at least temporarily – next year. For simplicity, let’s focus on the biggest source of transitory inflation: vehicles (defined here as used cars and trucks, rental cars and new vehicles). This makes up around 5% of core PCE. Over the last two months, about 40bp of the 1.2% gain in core PCE owed to these categories. To put this into perspective, if these categories were unchanged, core PCE would have been 0.48% mom in April (2.9% yoy) and 0.31% in May (3.0% yoy). For illustrative purposes, BofA also ran scenarios for %yoy core PCE inflation through next year based on the following paths for car prices: full mean reversion to preCOVID levels, 50% reversal and 25% reversal, assuming trend core inflation of 2.0% in all other categories. This would lead to core PCE of 1.3%, 1.6%, and 1.8%, respectively, as shown on the chart below. This shows the sensitivity of inflation to a singular volatile category.

The path toward maximum employment is also uncertain for two reasons:

  1. it is unclear how much of the decline in the labor force will prove permanent; and
  2. the Fed has changed the definition of maximum employment.

For the former, BofA has previously estimated that the vast majority of those that dropped out of the labor force will be able to return with about half of the decline likely directly attributable to the pandemic. However, about 1.2 million reflects earlier retirement which is unlikely reversible. This will make it more challenging to fully recover the employment-to-population ratio (EPOP). Perhaps a work-around is to look for the prime-working age EPOP to return to pre-pandemic levels which can be achieved by March 2022 based on BofA's employment forecasts which currently is looking for a cumulative 5.9mn jobs to be created by 1Q 2022.

The other consideration mentioned by BofA, is that the Fed has changed its definition for maximum employment to be broad-based and "inclusive." This means that the recovery in the EPOP has to be felt throughout the population particularly for the most economically challenged cohort, i.e., no hikes until there is a surge in black employment. To achieve this, it will require an even tighter labor market where the “fringe” of the labor market is offered greater opportunities. This in particular calls for the prime-age EPOP to exceed pre-pandemic levels, further pushing out when the Fed might declare victory. And since it is the minority workers who have repeatedly stated they will not return to the labor force unless they get far more preferential terms, it is almost as if the Fed has engineered the current reaction function to one where it will continue to ease indefinitely and blame lack of "recovery" on black jobs for its refusal to stop the easing, as if injecting $120BN per month will somehow result in more black workers getting hired!

The Committee: divided

Last but not least, there is a growing divide on the Committee which complicates forward guidance. As of the June meeting there were 7 FOMC officials who expected hikes to start in 2022. According to BofA, all of these officials are regional Fed Presidents, some of whom have never fully embraced FAIT (below is Bloomberg's assumption of who is who on the dot plot).

And so, with the economy running strong and inflation pressures building – at least on the surface – these Fed officials are getting ready to remove accommodation. As BofA notes, this makes sense.... if you are still operating in the old regime: remember that the Fed hiked rates for the first time with core PCE inflation well below target. The view was that it was preferable to slowly normalize policy based on expectations of future inflation and growth to avoid having to hike quickly and destabilize the recovery. Hence the challenge with keeping the new framework “flexible”. BofA believes the “core” of the Committee – Powell, Brainard and Clarida – are much more influential in setting the course for policy. The Board of Governors and NY Fed President Williams will generally be in agreement. It is this group that is still strongly committed to FAIT with more than a token overshoot of the 2% target, preferring to err on the side of too much rather than too little inflation. Moreover, they might not be as concerned about higher inflation: indeed, the Board staff forecast shows a slower trajectory for inflation based on the latest FOMC minutes. The Committee members’ voices will be heard and can influence the decisions of the FOMC with the force of their arguments. As such, Meyer's advice is to pay more attention to the centrist members of the FOMC – such as Bostic and Harker – whose arguments could resonate with the Board.

Finally, markets, where we have seen a big moves in rates

The bond market has had a significant rally; at 1.30% the 10-year is back to mid-February levels. In fact, the curve has also flattened significantly in a way that typically doesn’t happen until the hiking cycle has started. So what gives? According to BofA's in house rates expert, Mark Cabana, the move is partly technical, driven by investors closing out short positions and trend-following hedge funds exacerbating rate moves. But it could also reflect the market becoming increasingly worried about structurally lower growth and inflation once the cyclical lift fades. It may also be that the market is doubting the Fed’s resolve to overheat the economy and facilitate higher inflation. For what it's worth, Meyer says that while the former is a reasonable argument, she strongly disagrees with the argument that the Fed has already blinked. That's because Powell has been setting the stage for this new framework even before the pandemic - which was a welcome catalyst to implement FAIT - and sees this as a chance to reset monetary policy.

In short: expect the flood of liquidity to continue for a long, long time.

Tyler Durden Mon, 07/12/2021 - 17:01

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Spread & Containment

The Coming Of The Police State In America

The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now…

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The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now patrolling the New York City subway system in an attempt to do something about the explosion of crime. As part of this, there are bag checks and new surveillance of all passengers. No legislation, no debate, just an edict from the mayor.

Many citizens who rely on this system for transportation might welcome this. It’s a city of strict gun control, and no one knows for sure if they have the right to defend themselves. Merchants have been harassed and even arrested for trying to stop looting and pillaging in their own shops.

The message has been sent: Only the police can do this job. Whether they do it or not is another matter.

Things on the subway system have gotten crazy. If you know it well, you can manage to travel safely, but visitors to the city who take the wrong train at the wrong time are taking grave risks.

In actual fact, it’s guaranteed that this will only end in confiscating knives and other things that people carry in order to protect themselves while leaving the actual criminals even more free to prey on citizens.

The law-abiding will suffer and the criminals will grow more numerous. It will not end well.

When you step back from the details, what we have is the dawning of a genuine police state in the United States. It only starts in New York City. Where is the Guard going to be deployed next? Anywhere is possible.

If the crime is bad enough, citizens will welcome it. It must have been this way in most times and places that when the police state arrives, the people cheer.

We will all have our own stories of how this came to be. Some might begin with the passage of the Patriot Act and the establishment of the Department of Homeland Security in 2001. Some will focus on gun control and the taking away of citizens’ rights to defend themselves.

My own version of events is closer in time. It began four years ago this month with lockdowns. That’s what shattered the capacity of civil society to function in the United States. Everything that has happened since follows like one domino tumbling after another.

It goes like this:

1) lockdown,

2) loss of moral compass and spreading of loneliness and nihilism,

3) rioting resulting from citizen frustration, 4) police absent because of ideological hectoring,

5) a rise in uncontrolled immigration/refugees,

6) an epidemic of ill health from substance abuse and otherwise,

7) businesses flee the city

8) cities fall into decay, and that results in

9) more surveillance and police state.

The 10th stage is the sacking of liberty and civilization itself.

It doesn’t fall out this way at every point in history, but this seems like a solid outline of what happened in this case. Four years is a very short period of time to see all of this unfold. But it is a fact that New York City was more-or-less civilized only four years ago. No one could have predicted that it would come to this so quickly.

But once the lockdowns happened, all bets were off. Here we had a policy that most directly trampled on all freedoms that we had taken for granted. Schools, businesses, and churches were slammed shut, with various levels of enforcement. The entire workforce was divided between essential and nonessential, and there was widespread confusion about who precisely was in charge of designating and enforcing this.

It felt like martial law at the time, as if all normal civilian law had been displaced by something else. That something had to do with public health, but there was clearly more going on, because suddenly our social media posts were censored and we were being asked to do things that made no sense, such as mask up for a virus that evaded mask protection and walk in only one direction in grocery aisles.

Vast amounts of the white-collar workforce stayed home—and their kids, too—until it became too much to bear. The city became a ghost town. Most U.S. cities were the same.

As the months of disaster rolled on, the captives were let out of their houses for the summer in order to protest racism but no other reason. As a way of excusing this, the same public health authorities said that racism was a virus as bad as COVID-19, so therefore it was permitted.

The protests had turned to riots in many cities, and the police were being defunded and discouraged to do anything about the problem. Citizens watched in horror as downtowns burned and drug-crazed freaks took over whole sections of cities. It was like every standard of decency had been zapped out of an entire swath of the population.

Meanwhile, large checks were arriving in people’s bank accounts, defying every normal economic expectation. How could people not be working and get their bank accounts more flush with cash than ever? There was a new law that didn’t even require that people pay rent. How weird was that? Even student loans didn’t need to be paid.

By the fall, recess from lockdown was over and everyone was told to go home again. But this time they had a job to do: They were supposed to vote. Not at the polling places, because going there would only spread germs, or so the media said. When the voting results finally came in, it was the absentee ballots that swung the election in favor of the opposition party that actually wanted more lockdowns and eventually pushed vaccine mandates on the whole population.

The new party in control took note of the large population movements out of cities and states that they controlled. This would have a large effect on voting patterns in the future. But they had a plan. They would open the borders to millions of people in the guise of caring for refugees. These new warm bodies would become voters in time and certainly count on the census when it came time to reapportion political power.

Meanwhile, the native population had begun to swim in ill health from substance abuse, widespread depression, and demoralization, plus vaccine injury. This increased dependency on the very institutions that had caused the problem in the first place: the medical/scientific establishment.

The rise of crime drove the small businesses out of the city. They had barely survived the lockdowns, but they certainly could not survive the crime epidemic. This undermined the tax base of the city and allowed the criminals to take further control.

The same cities became sanctuaries for the waves of migrants sacking the country, and partisan mayors actually used tax dollars to house these invaders in high-end hotels in the name of having compassion for the stranger. Citizens were pushed out to make way for rampaging migrant hordes, as incredible as this seems.

But with that, of course, crime rose ever further, inciting citizen anger and providing a pretext to bring in the police state in the form of the National Guard, now tasked with cracking down on crime in the transportation system.

What’s the next step? It’s probably already here: mass surveillance and censorship, plus ever-expanding police power. This will be accompanied by further population movements, as those with the means to do so flee the city and even the country and leave it for everyone else to suffer.

As I tell the story, all of this seems inevitable. It is not. It could have been stopped at any point. A wise and prudent political leadership could have admitted the error from the beginning and called on the country to rediscover freedom, decency, and the difference between right and wrong. But ego and pride stopped that from happening, and we are left with the consequences.

The government grows ever bigger and civil society ever less capable of managing itself in large urban centers. Disaster is unfolding in real time, mitigated only by a rising stock market and a financial system that has yet to fall apart completely.

Are we at the middle stages of total collapse, or at the point where the population and people in leadership positions wise up and decide to put an end to the downward slide? It’s hard to know. But this much we do know: There is a growing pocket of resistance out there that is fed up and refuses to sit by and watch this great country be sacked and taken over by everything it was set up to prevent.

Tyler Durden Sat, 03/09/2024 - 16:20

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate…

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate iron levels in their blood due to a COVID-19 infection could be at greater risk of long COVID.

(Shutterstock)

A new study indicates that problems with iron levels in the bloodstream likely trigger chronic inflammation and other conditions associated with the post-COVID phenomenon. The findings, published on March 1 in Nature Immunology, could offer new ways to treat or prevent the condition.

Long COVID Patients Have Low Iron Levels

Researchers at the University of Cambridge pinpointed low iron as a potential link to long-COVID symptoms thanks to a study they initiated shortly after the start of the pandemic. They recruited people who tested positive for the virus to provide blood samples for analysis over a year, which allowed the researchers to look for post-infection changes in the blood. The researchers looked at 214 samples and found that 45 percent of patients reported symptoms of long COVID that lasted between three and 10 months.

In analyzing the blood samples, the research team noticed that people experiencing long COVID had low iron levels, contributing to anemia and low red blood cell production, just two weeks after they were diagnosed with COVID-19. This was true for patients regardless of age, sex, or the initial severity of their infection.

According to one of the study co-authors, the removal of iron from the bloodstream is a natural process and defense mechanism of the body.

But it can jeopardize a person’s recovery.

When the body has an infection, it responds by removing iron from the bloodstream. This protects us from potentially lethal bacteria that capture the iron in the bloodstream and grow rapidly. It’s an evolutionary response that redistributes iron in the body, and the blood plasma becomes an iron desert,” University of Oxford professor Hal Drakesmith said in a press release. “However, if this goes on for a long time, there is less iron for red blood cells, so oxygen is transported less efficiently affecting metabolism and energy production, and for white blood cells, which need iron to work properly. The protective mechanism ends up becoming a problem.”

The research team believes that consistently low iron levels could explain why individuals with long COVID continue to experience fatigue and difficulty exercising. As such, the researchers suggested iron supplementation to help regulate and prevent the often debilitating symptoms associated with long COVID.

It isn’t necessarily the case that individuals don’t have enough iron in their body, it’s just that it’s trapped in the wrong place,” Aimee Hanson, a postdoctoral researcher at the University of Cambridge who worked on the study, said in the press release. “What we need is a way to remobilize the iron and pull it back into the bloodstream, where it becomes more useful to the red blood cells.”

The research team pointed out that iron supplementation isn’t always straightforward. Achieving the right level of iron varies from person to person. Too much iron can cause stomach issues, ranging from constipation, nausea, and abdominal pain to gastritis and gastric lesions.

1 in 5 Still Affected by Long COVID

COVID-19 has affected nearly 40 percent of Americans, with one in five of those still suffering from symptoms of long COVID, according to the U.S. Centers for Disease Control and Prevention (CDC). Long COVID is marked by health issues that continue at least four weeks after an individual was initially diagnosed with COVID-19. Symptoms can last for days, weeks, months, or years and may include fatigue, cough or chest pain, headache, brain fog, depression or anxiety, digestive issues, and joint or muscle pain.

Tyler Durden Sat, 03/09/2024 - 12:50

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Uncategorized

February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…

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By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

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