Fed Expected to Overhaul Language and End Numerical Thresholds - Deutsche Bank (SPY)
Tweet
Share
E-mail
On Wednesday, the FOMC is expected to announce its rate decision. In the view of Deutsche Bank's Chief U.S. Economist, Joseph LaVorgna, the Fed will look to change its current forward guidance on unemployment and inflation, ending numerical thresholds.
"Based on the Fed's public displeasure with the current language on forward guidance, which is evident in both the FOMC minutes and recent speeches, we expect an overhaul of the language in the post-meeting communiqué," said LaVorgna. "Policymakers will drop their numerical thresholds for unemployment and inflation."
"Instead of providing a threshold on the unemployment rate for when the Fed would contemplate a hike in rates, policymakers will now track a broad array of economic indicators. To wit, the Fed's reaction function will be qualitative rather than quantitative. What indicators should we be following? Vice Chair Janet Yellen essentially told us last March the five most important series she was watching with respect to the labor market. Expect her colleagues to be following the same," he added.
LaVorgna said Yellen will be watching nonfarm payroll gains, gross job flows, the hiring rate, the quit rate, and real GDP growth.
"Last year, the economy grew +2.5% as measured on a Q4 over Q4 basis, and this year, the FOMC is predicting growth of +3.0%, at least according to the December 2013 central tendency. According to Yellen,"…a convincing pickup in growth that is expected to be sustained could prompt a determination that the outlook for the labor market had substantially improved even absent any substantial decline at that point in the unemployment rate." Consequently, if the unemployment rate declines against the backdrop of stronger GDP growth, a quickening pace of payroll gains, faster job churn, a rising hiring rate and a falling quit rate, we can then expect monetary policy to be tightened," he a said.
"Based on the Fed's public displeasure with the current language on forward guidance, which is evident in both the FOMC minutes and recent speeches, we expect an overhaul of the language in the post-meeting communiqué," said LaVorgna. "Policymakers will drop their numerical thresholds for unemployment and inflation."
"Instead of providing a threshold on the unemployment rate for when the Fed would contemplate a hike in rates, policymakers will now track a broad array of economic indicators. To wit, the Fed's reaction function will be qualitative rather than quantitative. What indicators should we be following? Vice Chair Janet Yellen essentially told us last March the five most important series she was watching with respect to the labor market. Expect her colleagues to be following the same," he added.
LaVorgna said Yellen will be watching nonfarm payroll gains, gross job flows, the hiring rate, the quit rate, and real GDP growth.
"Last year, the economy grew +2.5% as measured on a Q4 over Q4 basis, and this year, the FOMC is predicting growth of +3.0%, at least according to the December 2013 central tendency. According to Yellen,"…a convincing pickup in growth that is expected to be sustained could prompt a determination that the outlook for the labor market had substantially improved even absent any substantial decline at that point in the unemployment rate." Consequently, if the unemployment rate declines against the backdrop of stronger GDP growth, a quickening pace of payroll gains, faster job churn, a rising hiring rate and a falling quit rate, we can then expect monetary policy to be tightened," he a said.
Serious News for Serious Traders! Try StreetInsider.com Premium Free!
You May Also Be Interested In
- Deutsche Bank Upgrades Medical Properties Trust (MPW) to Hold, 'Debt Maturity Likely Resolved Until At Least 2025'
- Piedmont Lithium Receives Mining Permit Approval for Carolina Lithium
- Deutsche Bank Downgrades Cabot Corp. (CBT) to Hold
Create E-mail Alert Related Categories
Analyst Comments, FedRelated Entities
Deutsche Bank, FOMC Minutes, Federal Open Market Committee, LayoffsSign up for StreetInsider Free!
Receive full access to all new and archived articles, unlimited portfolio tracking, e-mail alerts, custom newswires and RSS feeds - and more!
