Wanna See Some More Data Dependence?

Given the rash of news this week suggesting that the U.S. economy just keeps on truckin' -- The Skeptical Speculator has the round-up here and here -- I couldn't resist this special edition of the Carlson-Craig-Melick estimates of market expectations for the June meeting of the Federal Open Market Committee:

 

 

If you are new to this, you can read about the Carlson-Craig-Melick estimates in this paper:

Download CCM.pdf

If you're an old pro, here's the data:

Download june_pdfs_april_26.xls

Comments

[CalculatedRisk]

After Chairman Bernanke's comments today, the reaction (at least in the media) is that its 'one and done' - at least a pause in June.

Without Bernanke's comments, I would have expected at least two more rates hikes based on recent data - unless we see weakness in the economy in the interim. And your graph shows 25 bps at both the May and June meetings.

Barry Ritholtz thinks "Pause/Resume Scenario Increasingly Likely"
http://bigpicture.typepad.com/comments/2006/04/pause_remue_sce.html

Hmmm ... I'm confused (a common state of mind!).

Best Wishes and thanks for these updates.

[jeff]

I have thought that with the data this strong, rates would go up to 5.5%. Some true bears think that they can't stop until 6%. The good news is that China raised its rates for the first time in a long time. Would like to see more hikes from them.

[cb]

Dave,

If monetary policy affects the economy with a 12-18 month lag, how come the Fed is in a data dependent mode?

[jeff]

cb, i am not a PhD, but I would like to take a shot at that. First, they need to rely on something. Moving rates around because you feel like it is no good!

They also look at other indicators, like the stock market. Stocks basically forward look, and a rallying market will give you an indication that the economy is expanding. Greenspan looked a lot at productivity and utilization. He also looked a lot at the employment cost index.

Data changes over time, and the specific data that they look at changes over time as well. Back when I began trading, it was all about Merchandise Trade, and every Thursday, money supply figures were big.

I think the fed looks at the data, and tries to extrapolate the numbers into the future based on random walk or some other model.

Dave I am sure can answer this question better. He can use the "chile cheese burrito index" to illustrate his point!

[bailey]

Prudent Bear's Doug Noland presents YTD data suggesting pausing at this time is NOT what we need: bank credit+12.4%, securities credit+ 9.1%, c&I loans+15.5%, R.E. loans+11%, m2+5.6%, commercial paper+17%. An especially interesting number to watch is durable goods that are running YOY +19.7, with x-transports +11.5%. To those who whine about housing sales demise, existing home sales are running at 6.92 million annualized. That's up from an avg of 3.99 million for the decade of the 1990s. Have we had a population surge I missed?
So, there are plenty of reasons to question why BB chose this time to suggest it may be time for the Fed to look through the numbers, to pause until we see how past increases play out.
I think BB deserves more credit & more time before he's metaphorically lambasted for this call. These days, NO ONE, not the Administration, not Congress, not our business leaders, not even our "religious leaders" wants to question our bubbling economy. My guess is BB's facing a revolution of his FOMC peers (supported by politicians up for reelection this fall.) Ever hear the expression, "give them enough rope, ..."? Well, it's my guess this is the best & only strategy BB has in his arsenal at the moment.
But, all's not lost. The ten year yield influences mtg. rates, not fed funds. And, it will be fun to watch Europe try once again to argue that our dollar should NOT fall through the floor.
The tremendous benefits we have with BB are that he is NOT a power-groupie & he's EARNED the right to lead the Fed in these most trying times. So, for the time being I'm all for "looking through the data" and giving BB my full support. My greatest hope is that BB has Fed Staff behind him for the job ahead.