KEY DATA: Leading Indicators: +0.6%/Philadelphia Fed: 24.5 (-16.3 points)/Jobless Claims: 289,000 (down 6,000)
IN A NUTSHELL: “The Fed may be shifting into “patience” mode, but the economy is continuing to accelerate.”
WHAT THE DATA MEAN: Today’s economic reports showed that the economy continues to improve. The Conference Board’s Leading Economic Index jumped again in November and it looks like the increases are pointing to a very strong economy going forward. Looking at a graph of the index, the rise seems to match the 2003-2004 housing bubble economic surge. Supporting the view that the economy is picking up steam was another fall in weekly jobless claims. The jump in claims near Thanksgiving seems to have been a one-week wonder and we are back to record lows, when adjusting for the size of the labor force. As for the Philadelphia Fed’s Business Outlook Survey, a large decline was expected. This index can be very volatile and the November number was one of the highest on record. The December level also points to strong growth, especially since orders remain solid.
FOMC Commentary: Yesterday, the Fed did and didn’t do what I thought they would and should do: Remove the “considerable time” phrase. Maybe. It didn’t do it because it repeated it. But more importantly, the Committee substituted a new comment, “that it can be patient (emphasis added) in beginning to normalize the stance of monetary policy”, and noted that patience and considerable time were similar if not equal. Getting confused? No kidding! The statement seems to be the most tortured attempt at changing the psychology surrounding the timing of tightening I have seen. I guess that is what happens when you worry more about market reaction than policy clarity. We know little more now than we did before the meeting and press conference. So much for better communications.
So, what does patience mean, when it comes to rate hikes? Chair Yellen said we have a breather for the next two meetings. However, the chart of fed funds rate expectations points to a tightening in 2015, which will likely come at around mid-year. What would make her lose her patience? Stronger growth and that is where the data come in. By the time we get to the April meeting, we will have three more employment reports and GDP numbers for the fourth quarter of 2014 and first quarter 2015. If the Leading Indicators are pointing to anything it is the string of 3.5% growth rates could be sustained. If that is the case and the job gains are above 250,000 and the unemployment rate continues to decline, it would be hard to see how wage increases don’t accelerate. But I am guessing that patience will be tied to compensation and until we actually see large increases in wages, the Fed will continue to dawdle.