Economic Weakness Only Temporary – Fed Officials

Friday’s weaker-than-expected nonfarm payrolls don’t seem to have changed attitudes at the Fed. NY Fed President William Dudley, a noted dove, Monday said he viewed the figures “as reflecting temporary factors to a significant degree,” namely the unusually harsh winter weather. He of course hedged his comments with the need to monitor developments and said that it “remains uncertain” when the Fed would start lifting rates, “because the future evolution of the economy cannot be fully anticipated.” In other words, the Fed remains data-dependent, which we already knew. Atlanta Fed President Lockhart was somewhat more confident. He agreed with Dudley that Q1 “was anomalous again, just like a year ago,” but said he “would probably be biased toward the July or September dates as opposed to June” for starting the tightening. “I’m not ready yet to conclude a slowdown is underway,” he said.

Reflecting these comments, the longer-dated Fed funds rate expectations moved up by 5 bps, undoing about half of the move that occurred on Friday after the release of the NFP, while 10 year bond yields were up 6 bps, unwinding most of the 7 bps rally that occurred Friday. Clearly the officials are expecting that like last year, a depressed winter will be followed by a more normal spring and that their forecasts will come to pass. The similarity with last year can be seen in the graph of the economic surprise index, which is following last year’s pattern quite closely. The indicator has already started to turn up, suggesting that the worst disappointments may already be behind us. This would allow the Fed to tighten policy earlier than the market currently expects, which is sometime around October or next March, depending on whether they move to 25 bps or 50 bps as their first move. The comments helped to revive interest in the dollar and the US currency rose against almost all its counterparts.

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