The Chair’s testimony is always more important to markets than the report. But the Fed has an extensive and talented research staff and in some cases privileged access to information, so there are usually a few tidbits in the report itself. Here are a few items I noticed. I will not try to pull the points into a coherent narrative. It was a busy week, so I will use the excuse of wanting to be straight objective about what they think. This review is not exhaustive. These are things I noticed, reflecting what interests me. And balance sheet detail, which they get into in gory detail, does not.
- On p.1 they describe the labor market as tight, although less tight than it was. In a follow up elaboration on p.14, they compare current labor market tightness with that immediately pre-Covid. They suggest that the evidence implies that it is currently as tight or tighter and that conditions in late 2019 were themselves tight. This fits my 2 Stage Disinflation hypothesis.
- On p.2, they describe the financial conditions as tight, although they also point out that they view the banking system as sound.
- On p.4, they suggest that monetary policy rules are prescribing a less elevated funds rate than they had been. But they also suggest that the current signals are near the current level of the actual funds rate, so it is not obviously a dovish point. They follow up with an elaboration on p. 41, where they emphasize weaknesses in monetary policy rules. They specifically point out that they are likely to be particularly unhelpful when the Effective Lower Bound (ELB) on rates is proximate, a point I have made myself on several occasions. The Fed does not use monetary policy rules, although they like to talk at length about them.
- On p.6, the flash a chart showing the now standard breakdown of core inflation into core goods, core services ex-housing and rents.
- On p.7, they express high confidence that rent inflation will continue to slow. And they have a cool chart showing a few measures of marginal rents to document the point. They have access to data that I do not have access to.
- On p.15, they raise the prospect of productivity growth remaining at its recent moderate trend or possibly accelerating in response to AI and robotics. This asymmetry marks them as productivity bulls.
- On p.17, they express more concern about the lowish saving rate and the reduced stock of bank deposits than I would. They have become almost QE-ish on this point, IMV.
- On p.18, they express a fairly downbeat view of capex, although it is arguably more about recent trends than about the outlook. They don’t sound particularly optimistic there.
