Bond Market: Revealed An Important Insider Review at The is the of the Cleveland Federal Reserve.  While her speeches are normally more general in nature. Her 14 presentation to the has more detail. Allowing to understand her more hawkish of the . economy and Fed policy.

To understand how bond Market function let’s begin with her general opinion the macroeconomy:

Over and next, I expect above-trend output growth, continued strength in labor and firming inflation. I believe the . economy is slightly beyond most employment, from the standpoint of the cyclical conditions monetary policy can , and that inflation reach our symmetric 2 goal on a sustainable basis over the next one to two years. is based on favorable underlying fundamentals, including accommodative monetary and fiscal policies, healthy household balance sheets, rising personal income, a global economy that is improving overall, and stable inflation expectations.

 “Above-trend growth” describes the relationship between projected GDP growth ( is a combination of population and productivity advances, along with increases in investment spending) and real growth.  When real growth is faster than projected growth, inflation results.  “Maximum employment’ also has inflationary implications.  The basic theory holds that most employment causes inflation.

Mester also bases her US Bond Market bullish projections on recent developments.  The Tax Cuts and Act and increased federal spending increase domestic demand while the synchronous nature of global growth should increase foreign appetite for . goods (although the dollar’s strength limit growth). are all sound prognostications.

Let’s turn to the Mester’s opinion the .  Mester believes the economy is near full employment is largely supported by the data.  The unemployment is 3.%.  The moving averages of establishment growth are also very strong:

The monthly data is noisy and to many revisions.  Using various moving averages removes that noise.  The 3, 6, and 12-month moving average of jobs gains are clustered around 200,000 – a very strong pace for an economy far an expansion.  Other jobs market data also supports Mester’s “full-employment” :

The above is from the Atlanta Fed; with the exception of wages, indicators are now above respective highs of the last expansion.

As for prices Mester argues, “I expect to see month-to-month variation in the numbers around an underlying upward trend in inflation, as inflation moves to our goal on a sustainable basis over the next or so.”  , she runs in the same that the Fed has had for the last five years: prices been reluctant to comply with the Fed’s near-constant projection for prices to move above 2%.  A look at the moving averages of PCE price increases shows the :

As with the jobs numbers, the moving averages remove the monthly noise from the indicator.  Currently, all the moving averages are below the 2% .  And we’ve been in this exact before (where the 3 and 6-month averages are rising) almost exactly one ago.  While Mester comments that the Fed’s 2% PCE target is symmetrical (meaning the Fed would be concerned if prices spent a prolonged period below or above 2%) she seems to pull the trigger on hikes before prices are above the 2% for any length of .

Mester bolsters her argument by noting that anecdotal evidence from in her district indicates increasing pricing pressure.  This is supported by the latest Beige Book, observed:

Prices increased across all Districts, generally at a moderate pace. There were widespread that steel prices , dramatically, to the new tariff. Prices for building materials continued to briskly, especially for lumber, drywall, and concrete. Transportation costs also generally , with contacts citing fuel prices and shortages of truck drivers as the primary causes. There were scattered of companies successfully passing through price increases to in manufacturing, technology, transportation, and construction. generally expect further price increases in the months ahead, particularly for steel and building materials. 

The latest ISM manufacturing report adds further confirmation.  Nevertheless, the latest Fed projections don’t the PCE price index rising to 2% until 201.  Although Mester’s price arguments are on sounder footing than they would been a year ago, there is still enough uncertainty surrounding the PCE index to call for caution when projecting sharp price increases.

              Mester is undoubtedly one of the more hawkish members of the Fed.  Her of the macroeconomy and are strongly supported by the data.  Her on prices, , are so.  The PCE index’s move above 2% is recent; and the Fed has projected that prices would move above 2% “in the intermediate term” for several years, to have prices stay weak.  The Fed should wait for the PCE price index to remain above 2% for more than a month before taking a more hawkish polity stance.

Data source: By HaleStewart from XE Currency