Thoughts on the Fed and Today's US Economic Data

Here are some thoughts on the Fed's decsision yesterday and the key economic data released today.

Fed
1.  The Fed's action was essentially an easing, not just keeping policy steady.   As I've argued, the Fed's forward guidance is more important than a hike in the funds rate, as the latter would just be catch-up to the prior forward guidance  -- which was built into all the markets (more broadly than just the fed funds futures market, which reflected not just Fed forward guidance but also feedback from the reactions of other markets).

       a.   Keeping the funds rate steady was tantamount to an easing, as well as was the ratcheting down of the "dots."    The markets had built in 4 rate hikes for the year, which included March.

       b.  The easing was essentially reversing what was a policy mistake in December, when the Fed projected 4 rate hikes in its forward guidance.   The financial market turmoil reflected in part this Fed projection -- although Yellen was careful to blame the turmoil on foreign developments

2.  The Fed's policy decisions so far have been done with a disdain for actual economic data:

      a.  The Fed skipped tightening in September, even though US economy had grown above trend for two consecutive quarters (Q2 and Q315).

      b.   The Fed tightened in December when Q4 economic growth was weak.

       c.   The Fed held the fund rate steady in March when both economic growth and core inflation were speeding up.

3.  This leaves trying to figure out the timing of the next Fed rate hike almost independent of what's going on in the US economy. 

      a.   The next Fed rate hike may depend on European and Chinese economic data, rising stock market, steepening yield curve, etc.

      b.   The best signal could be what's built into the Fed Funds futures market, as the Fed may want to "follow" the market.

4.   The reason the Fed wants to lift the Funds Rate is that it believes it is too low relative to a longer-run level that officials term then "neutral" rate  -- the fund rate that is consistent with trend GDP Growth when the economy is at full employment.

       a.   The neutral rate is not observable directly -- making Fedspeak about it sound almost like the medieval debate over how many angels fit on a pinhead.   To be sure, the fact that the Unemployment Rate continues to fall means the economy is growing at an above-trend pace.   So, the current funds rate is presumably below the neutral level.

Today's Key US Economic Data
1.  Today's data provide more evidence that the economy has picked up steam in the final month of the quarter.

2.   Initial and Continuing Claims retraced only part of the prior week's drops, keeping them at the low end of this year's range.

        a.   Initial Claims were for the March Payroll Survey Week.  They are not a reliable predictor of Payrolls (as they reflect only one of several "flows" impacting the labor market), but they suggest another decent gain.

3.  The jump in the March Phil Fed Mfg Index to +12.4 from -2.8 in February puts it at a level that is consistent with the Mfg ISM climbing above 50 in the next report (due April 1).