I thoroughly enjoy Bob Dylan though I will admit that listening to him ( and I have for over 50 years) is a bit like learning to enjoy good Scotch. It is an acquired taste. The WSJ has an article on a speech which he delivered at some pre Grammy ceremony.
Via the WSJ:
The most enigmatic of music icons made a surprisingly direct statement about his career Friday, as Bob Dylan delivered a half-hour speech that delved into his musical influences and enmities, and his feelings about being a target for critics.
“Critics have been giving me a hard time since day one. Critics say I can’t sing. I croak. Sound like a frog. Why don’t critics say that same thing about Tom Waits?,” he said, according to a transcription of the speech by the Los Angeles Times.
The speech in Los Angeleo toward the end of an annual Grammy concert for the charity organization MusiCares, where Dylan accepted the person of the year award. The concert featured all-star roster of acts who covered his songs, including Beck (“Leopard-Skin Pill-Box Hat”), Bonnie Raitt (“Standing In the Doorway”), Jack White (“One More Cup of Coffee”), Bruce Springsteen (“Knockin’ On Heaven’s Door”), and Neil Young (“Blowin’ In the Wind”).
Dylan himself didn’t perform. Instead, after being introduced by former President Jimmy Carter, he read a from a sheaf of notes, thanking his early champions, including John Hammond and Joan Baez. He expressed some bitterness about musicians who disparaged his work, such as Merle Haggard, he said. Some of his kindest words were for admired peers who recorded his songs and brought them wider recognition, including Johnny Cash and Jimi Hendrix.
Hendrix “took some small songs of mine that nobody paid any attention to and pumped them up into the outer limits of the stratosphere and turned them all into classics. I have to thank Jimi, too. I wish he was here,” said Dylan, 73 years old.
He ended on a poignant note about the rockabilly pioneer Billy Lee Riley. Riley’s song “Red Hot” remains a standard of the genre, but in the late 1950s his stardom was eclipsed by a bigger Sun Records star, Jerry Lee Lewis. Riley, who Dylan described as a good friend, received aid from MusiCares when his health deterioriated. He died in 2009 at age 75.
As Dylan wrapped up his address, he said, “I’m going to put an egg in my shoe and beat it.”
For the
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That is the famous advice that a Revolutionary commander delivered to his troops regarding the proper moment to fire at the enemy at the Battle of Bunker Hill. That is also the advice proffered by former Treasury Secretary Larry Summers regarding the proper moment for the FOMC to raise rates. He wants the monetary solons to defer action until inflation is fully present.
Via the FT:
February 8, 2015 7:21 pm
Only raise US rates when whites of inflation’s eyes are visible
I
cannot recall a moment when the gap between what markets expect the US Federal Reserve to do and what the Fed itself has forecast it will do has been as large. Markets predict that the Fed will raise rates only to 1.6 per cent by the end of 2017; the Federal Open Market Committee’s average forecast is 3.5 per cent.
Such a divergence raises the risk of volatility and poses a communications challenge for the Fed. More important, it raises the question of what should guide future policy.
Especially after Friday’s very strong employment report, there can be no doubt that cyclical conditions are normalising. The unemployment rate now is at its postwar average level, and continues to fall. Job openings are above their historic average. Other indicators such as the insured unemployment rate suggest a normal or rapidly normalising economy. All of this taken in isolation would suggest that interest rates should not remain at zero much longer.
On the other hand, the available inflation data suggests little cause for concern. The core consumer price index has averaged 1.1 per cent over the past six months; if housing costs were stripped out it would be zero. Wages actually fell in December and over the past year employment costs have risen 2.25 per cent which, in conjunction with productivity growth of only 1 per cent, suggests inflation of below 2 per cent. Perhaps most troubling: market indications suggest inflation is more likely to fall than rise .
The Fed has rightly made clear that its decisions will be data dependent. The further key point is that it should allow the flow of information on inflation rather than on real economic activity to determine its timing in adjusting interest rates. And it should not raise rates until there is clear evidence that inflation, and inflation expectations, are in danger of exceeding its 2 per cent target. Here are four important reasons why.
First, real wages for most workers have been stagnant. Median family incomes are down by 4.5 per cent over the past five years and the economy is about $1.5tn — or $20,000 for the average family of four — below pre-recession estimates of its 2015 potential.
In such circumstances efforts to reduce demand and growth require a compelling justification. Yet the idea that below normal unemployment will necessarily lead to accelerating inflation as suggested by the so called Phillips curve is very uncertain. Contrary to such predictions, inflation did not decelerate by much even a few years ago when unemployment was in the range of 10 per cent. Nor was there much evidence of accelerating inflation in the 1990s when the unemployment rate fell below 4 per cent.
Second, if inflation were to accelerate a bit this would be a good thing. It is now running and is expected to run below the Fed target. Prices are about 4 per cent below where they would have been if 2 per cent inflation had been maintained since 2007. So there is a case for some inflation above 2 per cent to catch up to the Fed’s price level target path. They may also be a case for inflation a little bit above 2 per cent for the next few years to allow real interest rates low enough to promote recovery when the next recession comes.
Third, a plane that accelerates too rapidly as it takes off may cause passengers discomfort while a plane that accelerates too slowly may crash at the end of the runway. Historical experience is that inflation accelerates only slowly so the costs of an overshoot on inflation are small and reversible with standard tightening policies. In contrast, aborting recovery and risking a further slowing of inflation is potentially catastrophic — as Japan’s experience demonstrates. So in a world where economic forecasts are highly uncertain, prudence in avoiding the largest risks counsels in favour of Fed restraint in raising rates.
Fourth, the US has never been more intertwined with the global economy. Higher interest rates and the stronger dollar they would bring would mean greater debt burdens for debtor countries, a growing US trade deficit that damages manufacturing, and growing protectionist pressures.
There is already a danger given all the problems in Europe, Japan and emerging markets that safe haven flows will drive the dollar up to the point where the US economy could be significantly slowed. Raising rates without evidence of rising inflation could dramatically increase real rates and exacerbate these risks.
None of this is to say that rates should never be raised or that inflation indicators might not justify a rate increase before long. It is to say that the Fed could inject much needed confidence in the economy today and minimise future risks by announcing and following a strategy of not raising rates until it sees the whites of inflation’s eyes.
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The FT reports that the trade surplus in China surged in January with exports down 3.3 percent and imports declining more than 19 percent. Paid pundits and for profit prognosticators had predicted a 6 percent jump in exports and just a 3 percent decline in imports. Some significant portion of the fall in imports reflects the slump in commodity prices but this armchair economic observer asserts that some of the slippage also reflects a decline in demand from Chinese consumers.
Via the FT:
China’s slumping economy hit trade in January, as both imports and exports came in worse than anticipated and the monthly trade surplus bulged to a record $60bn.
China’s exports fell 3.3 per cent in January from a year earlier, while imports slumped by 19.9 per cent, according to data released on Sunday by the Customs Administration. Analysts polled by Reuters had expected exports to rise by 6.3 per cent and imports to fall only 3 per cent, to give a trade deficit of $48.9bn.
The majority of the slump in imports was the result of falling commodity prices, especially coal and oil, according to analysts at ANZ Research.
China’s iron ore imports and crude oil imports fell by 9.4 per cent and 0.6 per cent respectively by volume. However, in value terms, iron ore imports dropped by 50.3 per cent and crude oil imports declined by 41.8 per cent.
The data reflect the cooling of China’s economic growth engine — last year the country’s gross domestic product grew at its slowest rate in more than two decades.
“China’s manufacturing sector is under great pressure as both external and domestic demand remains sluggish,” said ANZ in a statement.
A survey published on Sunday revealed that manufacturing, a key sector to the Chinese economy, contracted in January for the first time in more than two years.
However, analysts say strong seasonal distortions due to the Lunar New Year holiday — where consumption usually spikes and production falls — make it difficult to interpret January trade numbers. Last year the holiday fell in January, and this year it falls in February.
The ballooning trade surplus would normally be expected to support renminbi appreciation but the currency in fact weakened in January by 0.7 per cent, reflecting investment-related outflows.
The latest balance of payments data show that China posted its biggest quarterly capital and financial account deficit on record in the fourth quarter last year, a trend that is likely to have continued in January.
China suffered its largest capital outflows on record in the fourth quarter last year, according to balance of payments data released on Tuesday. The deficit of $91bn on the capital and financial accounts was the worst since quarterly data were first compiled in 1998.
Policy makers have responded to the weakness in the economy by cutting interest rates, and last week the central bank cut the required reserve ratio for its banks as it stepped up efforts to counter the impact of capital outflows and encourage banks to boost lending amid fresh data showing a weakening economy.
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The BIS attributes a chunk of the decline in oil prices to “financial flows”. Analysts at the BIS assert that the price declines exceed what one would expect given changes in supply and demand.
I suspect a plethora of sellers and a dearth of buyers led to the decline.
Via the FT:
February 7, 2015 11:12 am
BIS says financial flows partly to blame for oil collapse
Neil Hume, Commodities Editor
The near 50 per cent fall in oil prices since mid-June cannot be solely explained by changes in consumption and production, according to the Bank for International Settlements, which says heavy trading on commodity futures markets has also played a part.
In a preliminary analysis of the oil market rout, BIS, known as the central bankers’ bank, says financial flows have contributed to the rout along with changes in supply and demand balances.
The comments will add to the debate about the “financialisation” of commodity markets and the extent to which investors, big banks and hedge funds are driving prices of raw materials.
BIS says the last two comparable oil price declines in 1996 and 2008 were associated with a large drop in consumption, and in 1996, a surge in production. But this time changes in supply and demand — which BIS says have not differed markedly from expectations — fall short of providing a satisfactory explanation for the abrupt collapse in prices.
“Rather, the steepness of the price decline and the very large day-to-day price swings are reminiscent of a financial asset,” BIS said in its analysis. “As with other financial assets, movements in the price of oil are driven by changes in expectations about future market conditions.”
Oil prices have gyrated wildly over the past week, rising and falling by as much 9 per cent a day in response to news flow that has ranged from data on US oil rigs to storage levels.
Trading in Brent and West Texas Intermediate futures contracts dwarfs physical volumes and many traders say it is the supply and demand for futures which determines the price of oil.
According to PVM, a brokerage, daily futures volume in oil has risen from 3.4 times global demand in 2005, when the International Petroleum Exchange went electronic, to 17 times at the end of 2014 and has ratcheted up even further to over 20 times since the beginning of the year.
BIS also says the substantial increase in debt borne by the oil sector could also have contributed to the price slump.
A greater willingness on the part of investors to lend against oil reserves and revenue has enabled oil companies to borrow large amount of debt, much of it in the form of high yield bonds. This has been a key financing tool for many US shale producers.
“Against this background of high debt, a fall in the price of oil weakens the balance sheet of producers and tightens credit conditions, potentially exacerbating the price drop as a result of sales of oil (for example, more production is sold forward),” BIS said.
However, the Basel-based organisation says producers could find it increasingly difficult to hedge their exposure to volatile oil prices because banks may not be willing to take on the business.
“At times of heightened volatility and balance sheet strain for leveraged entities, swap deals may become less willing to sell protection to oil producers,” said BIS.
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Greece warned it was on course to run out of money within weeks if it doesn’t gain access to additional funds, effectively daring Germany and its other European creditors to let it fail and stumble out of the euro.
Greek Economy Minister George Stathakis said in an interview with The Wall Street Journal that a recent drop in tax revenue and other government income had pushed the country’s finances to the brink of collapse.
“We will have liquidity problems in March if taxes don’t improve,” Mr. Stathakis said. “Then we’ll see how harsh Europe is.”
Government revenue has declined sharply in recent weeks, as Greeks with unpaid tax bills hold back from settling arrears, hoping the new leftist government will cut them a better deal. Many also aren’t paying an unpopular property tax that their new leaders campaigned against.
Tax revenue dropped 7%, or about €1.5 billion ($1.7 billion), in December from November and likely fell by a similar percentage in January, the minister said.
Other senior Greek officials said the country would have trouble paying pensions and other charges beyond February.
Greece has made no secret of its precarious financial position, but the minister’s comments suggest the country has even less time than many policy makers thought to resolve its standoff with Europe.
Eurozone officials have asked Greece to come up with a specific funding plan by Wednesday, when finance ministers have called a special meeting to discuss the country’s financial situation.
The country needs €4 billion to €5 billion to tide it over until June, by which time it hopes to negotiate a broader deal with creditors, Mr. Stathakis said, adding that he believes “logic will prevail.”
If it doesn’t, he warned, Greece “will be the first country to go bankrupt over €5 billion.”
If the Greek government runs out of cash, the country would be forced to default on its debts and reintroduce its own currency, thus abandoning the euro. Most of the €240 billion in aid that Europe and the International Monetary Fund have pumped into the country would be lost.
Greece’s new, leftist government has been in a tug of war with its European creditors for days over relaxing strictures of its bailout program. Athens is pressing for less-onerous terms so it can reverse some of the austerity measures weighing on the country, but its partners in the euro currency area, led by Germany, have refused.
Before the two sides can address Greece’s broader bailout framework, however, they need to quickly find a way to keep the country solvent.
Mr. Stathakis said Athens has asked for €1.9 billion in profits from Greek bonds held by other eurozone governments. In addition, the government wants the eurozone to allow Greece to raise an additional €2 billion by issuing treasury bills, he said.
Both proposals clash with the rules governing Greece’s bailout and eurozone officials have dismissed them.
Europe wants Athens to commit to further labor-market and other reforms as a precondition for more money. The new government is refusing, arguing that it was elected to turn back many of the painful measures Europe and other creditors have demanded of it.
Berlin worries that the eurozone would lose leverage over Athens if it gives into itsrequest for an interim loan. Without a binding agreement from Greece to continue its reform program, officials say Germany is unlikely to back down.
Berlin, which is counting on financial pressures to force the Greek government’s hand, believes time is on Germany’s side.
Greece is set to remain in the spotlight next week as European Union leaders plan to meet for a summit in Brussels where they are expected to discuss the best way to reach an agreement between Greece and its creditors. Photo: AP.
Those pressures are being felt across Greece’s economy. Its banks lost €8 billion to €10 billion in deposits in January alone, government officials say. The banking system’s woes were exacerbated by the ECB’s decision earlier in the week to no longer accept Greek government bonds as collateral from banks seeking funds.
Greek lenders will instead have to rely on emergency central-bank funding, which is more expensive and requires renewal every couple of weeks.
Germany’s strong-arm strategy carries substantial risk. In addition to possibly triggering Greece’s exit from the euro, it carries political overtones.
Many Europeans already view Germany as the continent’s unyielding paymaster. Refusing to compromise with Greece’s new government over a few billion euros would further cement that image and open Berlin to accusations that it is ignoring Greece’s plight and riding roughshod over the democratic process.
Such resentments could fuel Europe’s other ascendant antiausterity movements, particularly in Spain, where the Podemos party, modeled on Greece’s governing leftists, has recently surged in the polls.
Even if Germany backs down on refusing Greece short-term funding, the two sides remain far apart on revising the broader framework. In addition to far-reaching economic reforms, which the Greek government says it won’t stomach and Berlin insists are essential, there are a host of other obstacles.
In private, German officials say there may be some leeway in extending the repayment schedule for Greece’s debt to the eurozone’s bailout funds and individual member states, but Berlin is less willing to lower the interest payments due on this debt.
Yet nothing short of a substantial reduction in those interest payments would give Greece’s government the fiscal flexibility it needs to meet its promises to end austerity.
On another crucial issue, supervision, Berlin appears ready to accept some changes. Greece’s bailout is overseen by the European Commission, the European Central Bank and the International Monetary Fund—the so-called troika.
Many Greeks feel the troika has humiliated their country. Doing away with the group is one of the new government’s key demands.
“We don’t want to see the IMF coming back to Greece,” Mr. Stathakis said.
German officials insist such changes can only be cosmetic tweaks—the troika could be renamed and some of its meetings held outside of Greece—designed to make a new program easier for Athens to sell to Greek voters and lawmakers. But they point out that IMF programs have always involved minute scrutiny of recipient governments.
—Gabriele Steinhauser, Viktoria Dendrinou and Matthew Dalton contributed to this article.
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Fidelity Move Creates $100 Billion Gap for Banks: Credit Markets
2015-02-06 14:59:17.429 GMT
(For more credit-market news, click TOP CM. To be sent
this column, click SALT CMW.)
By Cordell Eddings and Liz Capo McCormick
(Bloomberg) — The push to make money-market funds safer
means the biggest U.S. banks will pay more to borrow while
America’s near record-low financing costs go even lower.
Fidelity Investments said last week that its Fidelity Cash
Reserves Fund, the largest of its kind in the world, will stop
buying short-term debt issued by companies in response to a
regulation restricting it to U.S. government securities. The
move will leave a $100 billion funding hole for lenders, such as
JPMorgan Chase & Co. and Wells Fargo & Co. who rely on the fund
to buy their commercial paper and is “the opening shot” for
others to follow, according to Joseph Abate, a strategist at
Barclays Plc.
“Banks will be forced to find alternative sources of
funding at higher costs,” Abate said in a telephone interview.
“There had been a wait-and-see approach up to this point, but
the sheer size of the Fidelity fund is big enough alone to echo
across market interest rates.”
Short-term borrowing costs for U.S. financial firms are
already the highest in two years relative to Treasury bills, and
are 46 percent higher since the passing of the rule in July.
That’s an increase of 7 basis points to 22 basis points. A basis
point is 0.01 percentage point.
Fidelity Plan
The plan to transfer 99.5 percent of the $115.5 billion
holdings in the Fidelity fund to government-backed securities
would be a boon to a U.S. Treasury that’s already benefiting
from the Federal Reserve’s easy-money policies. Fidelity’s VIP
Money Market Fund and its Retirement Money Market Portfolio are
also taking similar actions.
The proposal by Fidelity, the Boston-based money manager,
is subject to shareholder approval on May 12. The firm expects
the changes to occur in the fourth quarter. The prime funds not
being converted will keep buying “commercial paper and other
eligible money-market securities as they do today,” Adam Banker,
a Fidelity spokesman, said in an e-mailed statement.
JPMorgan and Wells Fargo are two of at least 10 banks that
made up the funds holdings as of December, according to latest
data from Morningstar Inc. in Chicago.
Brian Marchiony, a JPMorgan spokesman and Ancel Martinez, a
spokesman from Wells Fargo, declined to comment.
Charles Peabody, a banking analyst at Portales Partners LLC
in New York, says the challenge for banks is limited.
“Banks are largely self-funding now, and you have to pay
up for commercial paper, making it less attractive,” he said.
New Rule
Institutional prime money funds, which invest in short-term
IOUs issued by companies known as commercial paper, have to
report beginning in October 2016 daily prices which may
fluctuate based on their underlying holdings. Government-only
funds, which investor in securities such as Treasury bills, will
have fewer restrictions.
For banks domiciled outside the U.S., whose IOUs make up
about $90 billion of the Fidelity fund’s holdings, the challenge
will be bigger because of their inability to tap into insured
deposits like their U.S. counterparts, according to Abate.
The U.S. Securities and Exchange Commission joined the Fed
and the Treasury Department to buttress money market funds soon
after the $62.5 billion Reserve Primary Fund collapsed in 2008
after bets it made on Lehman Brothers Holdings Inc.’s debts
soured. This triggered a run on other money funds and brought
the $1.76 trillion market for commercial paper to a standstill.
Sweeping Reform
The new regulations may worsen an already dimmed supply of
short-term government securities. That should put downward
pressure on rates from Treasury bills to repurchase agreements,
even as the Fed is eyeing raising its benchmark rate later this
year.
“This is another example of regulatory reform sweeping
into the high-quality liquid market space like Treasury bills,”
said Kenneth Silliman, head of U.S. short-term rates trading in
New York at Toronto-Dominion Bank’s TD Securities unit. “It
will have a major impact on the supply of those most liquid
securities, if we see a growing trend of these conversions. This
could put some pressure on rates, which are already close to
zero.”
The one-month bill rate averaged 0.0183 percent over the
last year, trading to as low as negative 0.0101 percent in
January, according to data compiled by Bloomberg.
Costs Rising
“You could start to see the flows out of prime funds to
government-only intensify in 2015,” said Andrew Hollenhorst, a
fixed-income strategist at Citigroup Inc. in New York. “As
money flows into government-only funds, you will have more
demand for government securities — so their prices will rise.”
This would mean fewer funds that are willing to buy bank
debt, according Barclays’s Abate.
Banks that rely on commercial paper have seen their
borrowing cost trend higher, with the 14-day moving average of
the difference between what U.S. financial institutions and the
government pay to borrow for three months the most since January
2013, Bloomberg data show.
Lenders would be left to “compete more aggressively to
raise the same amount of unsecured term financing from a smaller
universe of potential buyers,” he said.
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Merkel warns Ukraine peace plan may fail, but worth the effort
Stefan Wagstyl and Sam Jones in Munich
German chancellor Angela Merkel has warned that she may fail in her last-ditch attempt to ease the Ukraine crisis but said it was worth the effort for the sake of the people of Ukraine and the defence of peace and stability in Europe.
“This crisis cannot be solved by military means,” she said on Saturday, just hours after the latest round of talks in Moscow with French president François Hollande and Russian president Vladimir Putin. “This is why it is important to define substantive steps which bring the Minsk [ceasefire] agreement to life. This is the goal.”
She gave away no details of the discussions, which centre on implementing the September Minsk deal with the dividing line between Ukrainian troops and pro-Russia separatists redrawn to take account of recent separatist gains.
As she was speaking there were fresh reports from eastern Ukraine of continued heavy fighting.
After the five-hour negotiations on Friday, the three leaders agreed to hold another round of talks, by telephone on Sunday, with Ukrainian president Petro Poroshenko joining the call. Russian, German and French officials said the talks had been “constructive”.
Speaking at the Munich Security Conference, Europe’s largest security gathering, a tired-looking chancellor said it was uncertain whether her initiative “will be crowned with success. But in my view and the view of the French president it was worth it. We owe it to the people of Ukraine.”
Ms Merkel starkly criticised Russia for breaking international law and threatening “the foundation of peace and order in Europe.” And she praised Mr Poroshenko, who was sitting in the front row, for “taking a great political risk” in accepting the Minsk agreement, which involves Kiev ceding de facto control to the separatists of a slice of eastern Ukraine.
In a clear reference to Russia and the separatists, she said the failure to implement Minsk had been “very disillusioning. Very disappointing.”
Nato has begun discussing the possibility of sending arms to Ukraine, but Ms Merkel ruled out a military response from the west, including arms deliveries to Kiev, saying “the progress Ukraine needs cannot be achieved by more weapons.”
Nato secretary general Jens Stoltenberg said helping to arm Ukraine was being discussed, alongside a range of other measures. “Nato does not possess weapons so this is at the end something that has to be decided by nations,” he said.
The German chancellor defended passionately her decision to stick to economic sanctions and eschew a military solution. She urged patience, referring to her own experience of the decades taken for the Cold War to end. She said: “I am surprised at how faint-hearted we are, and how quickly we lose courage.”
Ms Merkel spoke shortly before she was due for trilateral talks in Munich with Mr Poroshenko, and US vice-president Joe Biden, who earlier raised fears that Ms Merkel’s initiative might lead nowhere and only allow Russia to gain more ground.
A growing division between the EU and US on how to deal with the Russian-backed rebels in eastern Ukraine was laid bare by Mr Biden on Friday. He poured scorn on efforts to reach out to Mr Putin, saying he had repeatedly violated all previous agreements to end the conflict.
“President Putin continues to call for new peace plans as his troops roll through the Ukrainian countryside and he absolutely ignores every agreement that his country has signed in the past and he has signed recently,” the US vice-president said in Brussels.
European diplomats and people familiar with Kremlin thinking said Mr Putin made a proposal to draw a new line of separation ceding more Ukrainian territory to the Russian-backed separatist rebels than agreed in Minsk.
But European diplomats rejected the notion that Friday’s talks had been based on a Russian peace plan, insisting that the focus was on reviving the Minsk agreement.
The Minsk agreement envisaged a ceasefire between government forces and Russian-backed separatists, withdrawal of heavy weaponry from frontline positions held on September 19, halting inflows of arms from Russia by re-establishing Kiev’s control over eastern borders and long-term measures to reintegrate the region by holding regional elections and granting more autonomy to the regions.
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Jon Hilsenrath writes an interesting exposition on the dilemna facing the FOMC. What is the non accelerating inflation rate of unemployment and are we close to that level?
Via the Jon Hilsenrath and the WSJ:
By
Jon Hilsenrath
Feb. 6, 2015 7:08 p.m. ET
The robust January jobs report highlights a dilemma for Federal Reserve officials as they enter a critical stretch in their policy deliberations: How hot can they let the job market run before raising short-term interest rates?
The labor market in recent months has shown vigor not seen in more than a decade, but the economy is emitting few obvious signs of wage pressure or consumer price inflation sometimes associated with such strength.
The stronger job market gives officials reason to consider raising short-term interest rates to prevent the economy from overheating, but low wage growth and inflation suggest such overheating isn’t near and give them cause to wait.
Fed Chairwoman Janet Yellen faces a busy public calendar in the next few weeks where she could provide new clues to her thinking about this mixed economic backdrop. She is set to present her semiannual monetary-policy report to Congress on Feb. 24 and 25. On March 18, the Fed will conclude a two-day policy meeting and she will hold a press conference.
At both turns, Ms. Yellen and her colleagues will be weighing whether to formally open the door to possible interest-rate increases in June. Most Fed officials have said they expect to start raising their benchmark short-term rate from near zero this year, and several have pointed to midyear as a likely time for liftoff.
For now, many are looking for ways to maximize their flexibility. “I think all possibilities from June on should remain open,” Atlanta Fed President Dennis Lockhart said in a speech Friday. “I don’t at this juncture have a prediction or preference.”
Net hiring during the November-to-January stretch, at more than 1 million, accelerated to its faster pace for a three-month period since 1997. The unemployment rate, though up a tick in January, has fallen to 5.7% from 6.6% a year ago and 8% two years ago. Still inflation has run below the Fed’s 2% objective for 32 straight months and wages, though showing some glimmers of revival, aren’t rising at the pace they did before recession.
At the heart of the challenge facing the Fed is a notion in economics that there is a short-run trade-off between unemployment and inflation. At some low rate of unemployment, the thinking goes, slack in the job market disappears; if unemployment goes below this point then wage and inflation pressures build as firms compete for a dwindling supply of workers.
Economists call this cutoff point a non-accelerating inflation rate of unemployment, or Nairu, and also point to a “natural rate” of unemployment where inflation is stable in the longer-run.
The problem is nobody knows the cutoff point. Economists merely estimate it.
At their December meeting, Fed officials estimated this rate lies somewhere between 5.2% and 5.5%. Unemployment in January, at 5.7%, is close to the top of that range.
But the estimate of how low unemployment can go is imprecise and moves around depending on what else is happening in the economy. In the early stages of the financial crisis, Fed officials estimated the jobless rate could drop to between 4.8% and 5% without causing inflation. A year ago some officials thought the upper limit of the range might be as high as 5.8%.
In the absence of hard-and-fast rules, Fed officials are watching wage gains, which have been sluggish through the recovery. Policy makers want to see them pick up, a sign the economy is nearing full employment, but not so much that the economy overheats and consumer price inflation gets out of control.
David Stockton, a senior fellow at the Peterson Institute for International Economics and former head of the Fed’s research division, said he saw in recent reports signs of firming wages. Average hourly earnings of private-sector workers were up 2.2% in January from a year earlier. That’s at the high end of its range in the past year, but still modest, below the pace during the booms of the mid-2000s or late 1990s. Other measures of worker pay, including a Labor Department report earlier this month of total worker compensation, have crept higher.
“I think we’re starting to see the first inklings of something starting to happen on the wage front,” Mr. Stockton said. The Fed, he added, could probably afford to let the unemployment rate keep falling because other factors including falling oil prices and a strong dollar are holding inflation down.
Some economists doubt the trade-off between unemployment and inflation is very strong. The logic of such a trade-off failed during the 2007-09 recession—the jobless rate soared but inflation didn’t fall as much as many economic models predicted. The relationship broke down during the 1970s, when both inflation and unemployment soared, and during the 1990s, when both were low. Explanations for why have varied.
Another challenge that complicates the Fed’s assessment: Conventional measures of unemployment might be missing important developments elsewhere in the job market.
“Employment progress…may be less than meets the eye,” Mr. Lockhart said Friday. “There are still almost 7 million workers counted as employed who say they are working part-time involuntarily.”
Fed officials are now debating whether the natural rate of unemployment is lower than previously thought. One study by economists at the Chicago Fed found an aging workforce might be increasing the economy’s ability to bear low unemployment without causing inflation. That’s because older workers tend to have lower jobless rates than younger workers.
If they conclude the economy can bear a lower jobless rate, officials might conclude they should wait longer before raising interest rates.
They will update their estimates of the natural rate at their March policy meeting.
Boston Fed President Eric Rosengren , in an interview with The Wall Street Journal last month, said he was thinking about revising his estimate down and suspected his colleagues were “going through the same exercise.”
Unsure how low they can let the jobless rate go, some Fed officials want to keep their options open as they prepare for the March meeting.
The Fed has said it will be “patient” in deciding when to start raising short-term interest rates. Ms. Yellen said use of that word means the officials likely wouldn’t raise rates at the next two policy meetings. If they dropped the patient phrase from the March statement, that would indicate they could move in June, but wouldn’t guarantee it.
The January jobs report bolsters the odds Fed officials will alter or scrap the promise to be patient at the March meeting.
“I would take [patient] out to provide optionality,” St. Louis Fed President James Bullard said on a panel earlier this week. “It doesn’t mean we’re going to do anything.”
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com
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WHAT TO WATCH:
* (All times New York)
Economic Data
* 8:30am: Change in Nonfarm Payrolls, Jan., est 230k (prior
252k)
* Change in Private Payrolls, Jan., est. 223k (prior 240k)
* Change in Mfg. Payrolls, Jan., est. 12k (prior 17k)
* Unemployment Rate, Jan., est. 5.6% (prior 5.6%)
* Average Hourly Earnings m/m, Jan., est. 0.3% (prior
-0.2%)
* Average Hourly Earnings y/y, Jan. , est. 1.9% (prior
1.7%)
* Average Weekly Hours All Employees, Jan., est. 34.6
(prior 34.6)
* Underemployment Rate, Jan. (prior 11.2%)
* Change in Household Employment, Jan. (prior 111k)
* Labor Force Participation Rate, Jan., est. 62.7% (prior
62.7%)
* Benchmark Revision of Establishment Employment Survey
Data
* Benchmark Revision of Establishment Employment Survey
Data</li></ul>
* 3:00pm: Consumer Credit, Dec., est. $15b (prior $14.081b)
Central Banks
* 12:45pm: Fed’s Lockhart speaks in Naples, Fla.
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