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

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

this year and , I expect above-trend output growth, continued strength in labor markets and firming inflation. I believe the . is slightly beyond most employment, from the standpoint of the cyclical conditions monetary policy , and that inflation will our symmetric 2 percent goal a the to two years. This is based favorable underlying fundamentals, accommodative monetary and fiscal policies, household balance sheets, rising personal , a global that is improving overall, and stable inflation expectations.

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

Mester also bases her future US Bond  bullish projections recent developments.  The and Jobs Act and increased federal will domestic demand while the synchronous nature of global growth should foreign appetite . goods (although the ’s strength limit growth). These all sound economic prognostications.

’s turn to the Mester’s opinion about the labor market.  Mester believes the economy is near full employment which is largely supported by the data.  The unemployment is 3.%.  The of establishment jobs growth also very strong:

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

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

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

As with the jobs numbers, the moving averages remove the monthly noise from the indicator.  Currently, all the moving averages are 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 ’s 2% PCE is symmetrical (meaning would be concerned if prices spent a prolonged period or above 2%) she seems ready 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 businesses in her district indicates increasing pricing pressure.  This is supported by the latest Beige Book, which observed:

Prices increased across all Districts, generally at a moderate pace. There were widespread that steel prices , sometimes dramatically, to the 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 successfully passing through price increases to in manufacturing, , transportation, and construction. Businesses 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 have the PCE price index rising to 2% until 201.  Although Mester’s price arguments are on sounder footing than they 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 more hawkish members of the Fed.  Her analysis of the macroeconomy and labor market are strongly supported by the data.  Her on prices, however, are less 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, only 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