Bond Market: Revealed An Important Insider Review at The Global Interdependence Center.  is the president of the Cleveland Federal Reserve.  While her speeches normally general in . Her May 14 presentation to the Global Interdependence Center has detail. Allowing to better understand her hawkish analysis of the . economy and Fed policy.

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

Over this year and next, I expect above- 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 address, and that inflation will our symmetric 2 on a sustainable basis over the next to two years. This is based on favorable underlying fundamentals, including accommodative monetary and fiscal policies, household balance sheets, rising personal , a global economy that is improving overall, and stable inflation expectations.

 “Above- growth” describes the relationship between projected GDP growth ( is a combination of population and productivity advances, along with increases in investment ) and real growth.  When real growth is faster than projected growth, inflation .  “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 three recent developments.  The Tax Cuts and Jobs Act and increased federal will domestic demand while the synchronous of global growth should foreign appetite . goods ( the ’s strength limit growth). These all sound prognostications.

’s to the Mester’s opinion about the labor market.  Mester believes the economy is employment is largely supported by the data.  The unemployment rate is 3.%.  The moving averages of establishment jobs growth also very :

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

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

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

As with the jobs numbers, the moving averages remove the monthly noise from the indicator.  Currently, all the moving averages are below the 2% level.  And we’ve been in this exact before (where the 3 and 6- averages are rising) almost exactly year 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 above 2%) she seems ready to pull the trigger on rate 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 reports that steel prices rose, sometimes dramatically, due to the new tariff. Prices for building materials continued to briskly, especially for lumber, drywall, and concrete. costs also generally rose, with contacts citing fuel prices and shortages of truck drivers as the primary causes. There were scattered reports of companies successfully passing through to customers in manufacturing, technology, , and construction. generally expect further 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 have the PCE price index rising to 2% until 201 Mester’s price arguments are on sounder footing than would have 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 of the hawkish members of the Fed.  Her analysis of the macroeconomy and labor market are strongly supported by the data.  Her view 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 a more hawkish polity stance.

Data source: By HaleStewart from XE Currency

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