24 Jan 2014

US Weekly Economic Briefing Will Janet’s Fed be that different from Ben’s?

The Fed is expected to welcome new faces in 2014 with set to transition into the role of Fed Chairwoman, Stanley Fischer nominated to take her former role as Vice Chair, and possible new governors and regional Fed presidents. What does this means for the future of monetary policy and financial regulation? What will happen to tapering and “rate hiking”?

clearest possible message to her audience. More Welcome Janet recently, she has focused on a wide array of employment Market participants had grown accustomed to Ben statistics beyond the traditional payrolls and Benanke’s Zen and professorial attitude in the face of unemployment data. In particular, she has emphasized heighted market volatility and financial strain. In just a the need to look at labor market dynamics through the few days, these participants will have to get accustomed lens of the Bureau of Labor Statistics’ Job Openings and to a new face at the Fed, that of Janet Yellen, the Labor Turnover survey. This desire to use as much data incoming Fed Chairwoman. As with any newcomer, it will as possible may not be such a bad thing given the recent certainly take some time for the initial unease to fade and employment puzzle: a sharply lower unemployment rate, markets to feel comfortable in the presence of the “non- strong monthly payroll gains and an ongoing fall in the bearded” face. However, Oxford Economics does not labor participation rate. Janet Yellen may effectively turn expect major changes in the direction of monetary policy out to be the right person at the right time for the Fed. under Yellen. Of course, she will eventually have to take a step back Yellenomics from the data to actually make policy decisions and Some view Yellen as more dovish than her predecessor convince other FOMC participants of her views, but we given her past statements about the lack of labor market see her methodological approach as an encouraging sign improvements and “optimal policy.” She has on for the future of monetary policy. What is more, we don’t numerous occasions stated that while some progress view Janet Yellen’s optimal policy views as asserting that had been made, much still needs to occur to return to there is an inevitable trade-off between inflation and robust employment trends. And, in a 2012 speech Yellen unemployment, but rather as an understanding of labor referred to an “optimal policy” rate at an market dynamics in a sub-potential economy. exceptionally low level until early 2016 with inflation US: Monetary policy temporarily exceeding the FOMC’s target of 2.0% for % % several years. Some observers (over)analyze this as a 3.0 Forecast 10 sign that Yellen is in favor of extremely loose monetary Unemployment rate 2.5 (RHS) policy, and that she would be willing to allow inflation to 9 go well beyond the mandated 2.0% target in order to 2.0 bring employment and growth back to full potential. 8 1.5 However, we view Janet Yellen not so much as a “very 7 dovish” Chairwoman, but rather as one who will openly 1.0 be more data dependent than her predecessor. In her 6 0.5 speeches, Yellen typically likes to illustrate her views with (LHS) a flood of data, charts and tables, eager to deliver the 0.0 5 2010 2011 2012 2013 2014 2015 2016 2017 Source: , Bureau of Labor Statistics, Haver

Economist: Gregory Daco, Lead US Economist | Tel: +1 646 503 3055 | e-mail: [email protected] 1 24 Jan 2014

A new Fisch in the pond Fischer’s proactive approach to monetary policy is further A new face at the Fed will likely take Yellen’s former role evidenced by his decision to purchases long-term of Vice-Chair: Stanley Fischer has recently been securities (in the midst of the global crisis). Fischer is nominated for that position by President Obama. Three above all practical in his approach to monetary policy, years her senior, Stanley Fischer brings a wealth of willing to adjust his beliefs should the situation require it – expertise and knowledge few others can rival. Fischer and there is no reason this fundamental attitude will taught many of the world’s leading policy makers, change should he be confirmed as Vice Chair. Bernanke and Draghi among them, and has held senior positions at the IMF, World Bank, and Citigroup. How will the duo function? A Yellen-led Fed, with Fischer as Vice Chair, will likely However, it is perhaps his actions while leading the Bank take a check-and-balance pragmatic approach. We of Israel (BoI) that warrant the most attention for cues as expect both Yellen and Fischer will look to each other for to Fischer’s thoughts on Fed policy. During his time at the confirmation (or, refutation) of their ideas, ensuring a BoI, Fischer radically reformed the central bank with new robust policy debate. regulation that notably created a Monetary Committee (monetary policy decisions prior were at the discretion of Fischer may have a slightly heavier weight when it comes the Governor alone). The BoI under Fischer also to the Fed’s views regarding international issues given implemented an explicit 1-3% inflation target band and his experience, but Yellen is expected to lead on clearly delineated central bank independence, a central domestic issues. In that regard, Fischer agrees that tenet for the implementation of responsible monetary quantitative easing warrants a place in the policy tool kit, policy. We view this as an indication that Fischer may but he has expressed some reservations about forward want to involve himself in the Fed’s macroprudential work guidance, preferring a conditions-based approach rather – especially given his international experience. than date-based for the simple reason that it retains flexibility and therefore central bank credibility. Should he Fischer’s monetary policy decisions while leading the BoI be confirmed, it will be interesting to see how the duo indicate he straddles the middle between the “dove” and interacts on this issue given Yellen’s seemingly “hawk” labels, preferring a proactive approach and increasing reliance on the tool. Finally, the two are relying on data for policy cues. Under Fischer, the Israeli relatively aligned on the view that accommodation will economy barely slowed down during the Great remain in place for some time, especially as inflation Recession, thanks in part to a timely and appropriate remains below target. policy response by the central bank. The BoI was the first to cut rates with the onset of the global financial crisis and the first to raise rates as the worst of the crisis past.

Fed's Dove-Hawk Scale in 2014: Federal Open Market Committee Voters Dove Hawk

Janet Yellen (Chair) X

Stanley Fischer (Vice Chair)* X (Governor)* X Daniel Tarullo (Governor) X (Governor)* X

Jeremy Stein (Governor)** X

Vacant (Governor) William Dudley (New York Fed President) X Sandra Pianalto ( Fed President) X Charles Plosser (Philadelphia Fed President) X

Richard Fisher (Dallas Fed President) X

Narayana Kocherlakota (Minneapolis Fed President) X * Awaiting confirmation ** Expected to leave in 2014

Economist: Gregory Daco, Lead US Economist | Tel: +1 646 503 3055 | e-mail: [email protected] 2 24 Jan 2014

New voting members macroprudential policy is critical to preserving financial President Obama has nominated Lael Brainard, formerly stability and supporting overall U.S. economic activity.” the U.S. Treasury Department’s top international official to replace Elizabeth Duke as Fed governor, and he has Taper on… re-nominated Jerome Powell for a second term. Both We don’t foresee the new faces at the Fed as Brainard and Powell are generally viewed as doves and dramatically altering our outlook for the US economy in their confirmation would not imply a substantial change in the coming quarters. Since the December 2013 FOMC the “dove-hawk” balance at the Fed. In addition to these meeting, it seems clear that the tide has swung in favor changes, Fed governor Sarah Bloom Raskin (viewed as of tapering with the reduced marginal efficacy and the dovish) will likely be leaving her role as Fed governor as risk to financial stability of too much quantitative easing she has been nominated to become deputy Treasury being put on the forefront of the debate. As such, and secretary, and Sandra Pianalto (viewed as a centrist) has given that economic data have generally been tilted to indicated her desire to leave her position as the the upside, we expect the Fed to announce further Cleveland Fed president this year. As illustrated in the tapering worth $10 billion at its January 28-29 FOMC table above, the Fed’s voting members in 2014 will still meeting. Furthermore, we expect ongoing economic be predominantly “doves” with Plosser, Fisher and Stein growth in the upcoming quarters will support an ending to standing out as “hawks.” As a result, we expect, most QE3 by the third quarter of 2014. voting members of the FOMC will favor an US: Stock prices expected to slow accommodative monetary policy stance in the face of still $, bil Index, 1941-1943=10 QE1, QE2 and Q3 announcements modest (but, gradually improving) economic growth. 1800 4000

3500 1600 S&P500 Yellen’s take on macroprudential policies (LHS) The Dodd-Frank Act of 2010 gave the Federal Reserve a 3000 1400 central role in achieving and maintaining financial 2500 stability. Under ’s rein, Fed governor 1200 2000 Daniel Tarullo was de facto considered in charge of Federal Reserve 1500 regulation as Bernanke focused predominantly on 1000 balance sheet monetary policy. Oxford Economics expects that while (RHS) 1000 800 Yellen may initially want to be more involved in regulation 500 than her predecessor, she will ultimately have the leisure 600 0 of delegating macroprudential regulation – focused on Jan/06 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 the financial system as a whole with a view to reducing Source: Haver Analytics systemic risks through greater financial stability – to Fischer and Tarullo. …But don’t push the “rate hike” button yet We also expect the Fed to pursue its effort to untie We view Yellen, Fischer and Tarullo as generally seeing tapering from “rate hiking,” and we view this as being the eye-to-eye on macroprudential regulation. They support a first true challenge for Yellen. Indeed, Bernanke and the tougher macroprudential framework under the auspices 2013 Fed were not very successful at getting this of the Dodd-Frank Act , “including enhanced risk-based message through to markets with early talks of tapering capital and leverage requirements, liquidity requirements, in May 2013 leading to surge in yields and massive an early remediation regime, and restrictions on capital flight out of emerging markets. In that regard, the activities”, surcharges for the biggest banks and stress March 18-19 FOMC will be critical as the Fed will most testing. As Yellen explained in a 2011 speech, “The likely want to hint towards an impending ending to Federal Reserve and other U.S. financial regulators have tapering (in the second half of 2014) without giving the accomplished a great deal since the Dodd-Frank Act […]. impression of an impending rate hike. Yellen’s We have put into practice an institutional framework for communication skills will be put to the test during undertaking a macroprudential approach to supervision negotiations with other FOMC participants and during the and regulation, and we have implemented processes for traditional press conference. identifying and responding to sources of systemic risk. However, much remains to be done, […] to deepen our understanding of the effectiveness of different policy tools. The bottom line is that developing an effective

Economist: Gregory Daco, Lead US Economist | Tel: +1 646 503 3055 | e-mail: [email protected] 3 24 Jan 2014

Latest data in detail

Existing Home Sales US: Single-family home sales Existing home sales regained some ground lost in 000s 000s previous months, increasing 1.0% to 4.87 million units 8000 1600

(seasonally adjusted annual rate) in December. Single 7000 1400 family sales bounced back, rising 1.9% and breaking the 6000 Existing (LHS) trend of four previous monthly declines. For 2013, total 1200 5000 existing home sales rose 9.1% while single family sales 1000 increased 8.2%. Affordability declined for the month with 4000 800 the national median existing home price up 11.5% from 3000 last year and the 30-year, conventional, fixed-rate 600 2000 New (RHS) mortgage rose to 4.46% in December. We expect the 1000 400 housing sector to lose some pace, hurt by tighter financial conditions, but we still expect the sector to grow 0 200 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 moderately in 2014. Source: Census Bureau, NAR

Summary of other data releases this week US: Weekly unemployment claims 000s According to the Federal Housing Finance Agency, housing price gains lost some momentum in November 580 4-week rising only 0.1% month-on-month and 7.6% year-on-year. 530 moving Initial jobless claims for the week of 18 January average registered a minor uptick though the trend of labor market 480 progress continues. Lastly, the Conference Board’s 430 Leading Economic Index rose only 0.1% in December as the US economic recovery continues to gradually gain 380 pace. 330

280 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Source: Employment and Training Administration

Economist: Gregory Daco, Lead US Economist | Tel: +1 646 503 3055 | e-mail: [email protected] 4 24 Jan 2014

The week ahead

Scheduled Data Releases

Date Release Period Previous Forecast 27 th Jan New Home Sales Dec 464,000 458,000

th 28 Jan Durable Goods Orders Dec 3.5% m/m 1.2% m/m th 0.2% m/m 0.4% m/m 28 Jan S&P/Case-Shiller Home Prices Oct 13.6% y/y 13.4% y/y th 28 Jan Consumer Confidence Jan 78.1 79.0 th QE: $75 QE: $65 29 Jan FOMC Announcement Jan billion/month billion/month th 30 Jan GDP Q4 4.1% (Q3 final) 3.6% 30 th Jan PCE Price Index Q4 1.9% 1.1%

30 th Jan Core PCE Prices Q4 1.4% 1.4%

30 th Jan Initial Claims w/e Jan 25 th 326,000 324,000 31 st Jan Consumer Sentiment Jan 80.4 82.0 st 0.2% m/m 0.2% m/m 31 Jan Personal Income Dec 31 st Jan Personal Spending Dec 0.5% m/m 0.1% m/m

For further information contact Gregory Daco ( [email protected] ), Oren Klachkin ( [email protected] )

Economist: Gregory Daco, Lead US Economist | Tel: +1 646 503 3055 | e-mail: [email protected] 5 24 Jan 2014

Key Indicators: United States Percentage changes from previous month unless otherwise stated Industrial Capacity Unemploy- CPI Core Housing Nominal Retail production Utilization ment CPI Starts Net Trade sales % % mn $ bn 2012 Dec 0.1 77.8 7.9 0.0 0.1 0.98 -38.3 0.3 2013 Jan 0.0 77.7 7.9 0.0 0.3 0.90 -42.4 0.1 Feb 0.6 78.1 7.7 0.7 0.2 0.97 -43.5 1.1 Mar 0.3 78.2 7.5 -0.2 0.1 1.01 -36.8 -0.3 Apr -0.3 77.9 7.5 -0.4 0.1 0.85 -39.6 0.2 0.2 77.9 7.5 0.1 0.2 0.92 -43.9 0.5 May Jun 0.2 77.9 7.5 0.5 0.2 0.84 -34.6 0.7

Jul -0.2 77.7 7.3 0.2 0.2 0.89 -38.8 0.4

Aug 0.5 78 7.2 0.1 0.1 0.88 -38.9 0.2

Sep 0.6 78.3 7.2 0.2 0.1 0.87 -43.0 0.1 Oct 0.3 78.4 7.2 -0.1 0.1 0.90 -39.3 0.5 Nov 1.1 79.1 7 0.0 0.2 1.11 -34.3 0.4 Dec 0.3 79.2 6.7 0.3 0.1 1.00 - 0.2

Financial Indicators: United States Percentage changes from previous month unless otherwise stated 3-month 10-year Money Exchange Exchange Exchange S&P Reserves T-bill T-bond Supply rate rate rate index 500 % % $/€ avg. Yen/$ avg. 3/73=100 $mn 2012 Dec 0.07 1.72 1.23 1.31 83.8 73.2 2.0 151372 2013 Jan 0.07 1.91 0.34 1.33 89.1 73.7 4.1 149838 Feb 0.10 1.98 0.12 1.33 93.0 74.7 2.2 149341 Mar 0.09 1.96 0.62 1.30 94.8 76.4 2.5 147266 Apr 0.06 1.76 0.32 1.30 97.8 76.4 1.3 146533 May 0.04 1.93 0.35 1.30 100.9 77.1 4.4 145434 Jun 0.05 2.30 0.45 1.32 97.2 76.4 -1.3 144893 Jul 0.04 2.58 0.59 1.31 99.7 77.4 3.1 147316 Aug 0.04 2.74 0.50 1.33 97.8 76.5 0.1 147567 Sep 0.02 2.81 0.43 1.34 99.2 76.2 1.0 147680 Oct 0.05 2.62 0.91 1.36 97.8 75.2 1.9 149475 Nov 0.07 2.72 0.08 1.35 100.1 76.2 3.7 146356 Dec 0.07 2.90 0.46 1.37 103.5 76.5 1.4 145740

Economist: Gregory Daco, Lead US Economist | Tel: +1 646 503 3055 | e-mail: [email protected] 6