Economic Insight

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Economic Commentary Economic Insight June 17, 2016 Surface Optimism The June FOMC statement, released earlier this week, read modestly positive as policy makers highlighted the notion that economic activity has “picked up” in the second quarter following a weaker-than-expected start to the year. Acknowledging the recent weakness in hiring and ongoing lackluster business investment, the Committee nevertheless went on to affirm their expectations for the U.S. economy to continue to improve and labor market conditions to “strengthen” over the near to medium-term. Additionally, the Committee reiterated the likelihood of further improvement in inflation as the impact of earlier declines in energy prices and prices of non-energy imports “dissipate.” During the press conference, however, Chair Yellen’s comments revealed a much more conservative view of the economy than proposed in the policy statement itself. Highlighting a number of “uncertainties” surrounding the longer-term outlook for the U.S. as a result of both international and domestic “risks,” Yellen urged a “cautious” approach to monetary policy. Signaling an increased number of concerns and “unknowns,” her remarks appeared at odds with the surface optimism proposed in the FOMC statement. In other words, while presenting a calm and optimistic front on the surface, underneath policymakers continue to grapple with a plethora of lingering worries that could easily stall or impede further improvement in growth and inflation, as well as further policy adjustments. 1 Labor Market Weakness In the aftermath of the April policy meeting, Fed officials were quite boisterous in their growing impatience for a summer rate hike. However, following a weaker-than-expected May employment report, the Committee appeared to lose their appetite for a further removal of accommodation near-term. While Fed officials are hesitant to put too much emphasis on a single data point, the labor market was nevertheless at the forefront of the argument for a second-round rate hike sooner than later. Thus, coupled with a number of additional “uncertainties” at home and abroad, a slowdown in the labor market seemingly stalled the campaign for a June policy adjustment. 1 “Be like a duck. Stay calm on the surface but paddle like hell underneath.” Page | 2 2016 Stifel, Nicolaus & Company, Incorporated One South Street, 15 th Floor Baltimore, MD 21202 Member NYSE Member SIPC 888.290.1762
Economic Commentary Economic Insight June 17, 2016 According to Yellen at Wednesday’s press conference, while the recent weakness in hiring was both “unexpected” and “disappointing,” there are a number of employment indicators that continue to suggest improvement in labor market conditions, including the JOLT survey. “I don’t think labor market progress has come to an end,” Yellen noted, although the recent decline in headline hiring does bear close monitoring. The latest bout of weakness is difficult to understand, she said, but most likely reflects lingering “uncertainties” surrounding the Committee’s outlook for how the labor market and other areas of the economy will continue to develop. “Uncertainties” “Uncertainty” was a reoccurring theme in Chair Yellen’s comments at Wednesday’s press conference. In her prepared remarks, Yellen highlighted a number of “uncertainties” surrounding the longer-term outlook for the U.S. economy including domestic headwinds from sluggish productivity growth and restrained corporate investment, as well as global “risks” including a potential Brexit and slow Chinese growth. Other “uncertainties,” Yellen said, include the longer-term prospects for topline growth and continued progress in the labor market. We do expect moderate, healthy growth for the rest of the year, she said; however there are a number of “uncertainties” that could impact that expectation. While these “uncertainties” are hardly new developments and were certainly well known to policy makers whilst calling for a summer rate hike earlier in the second-quarter, the severity of these peripheral variables has clearly increased against the back drop of unexpected domestic weakness culminating in a six-year low in the pace of hiring. Failing to develop and improve as expected in the six months following liftoff, domestic fundamentals were unsuccessful in supporting the Fed’s more optimistic outlook for above trend activity and multiple rate hikes in 2016. We are quite “uncertain” where rates are headed in the longer-run, Yellen said. The SEP, released in tandem with the June policy statement, furthermore echoed Chair Yellen’s more tepid and “uncertain” assessment of the longer-term pathway for growth and rates in the U.S. The Committee’s 2016 GDP forecast was reduced from 2.2% to 2.0%, now on par with stagnant expectations for 2017, 2018, and the Fed’s longer-run growth forecast. Additionally, amid an expected tepid growth environment, the Committee also reduced their outlook for rates. According to the June SEP, now six Committee members anticipate only a single hike in rates in the remaining six months of 2016. The Page | 3 2016 Stifel, Nicolaus & Company, Incorporated One South Street, 15 th Floor Baltimore, MD 21202 Member NYSE Member SIPC 888.290.1762
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Economic Insight

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