Fed and Interest Rates Discussion with Tim Duy

April 18, 2019

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Key points covered in this podcast

– Temporary hiring is a useful indicator for traders to consider

– Take bearish monetary policy commentary with a grain of salt

– Be wary of the Fed’s ‘phantom inflation menace’

Tim Duy is a professor at Oregon University, expert in the US macroeconomy and author of Tim Duy’s Fed Watch, a blog keeping market practitioners up to speed with key Federal Reserve news.

In this edition of our podcast Trading Global Markets Decoded, our host Tyler Yell talks to Tim about the Fed and interest rate decisions, whether central banks are falling prey to ‘Japanification’ and what to make of bearish monetary policy commentary. Benefit from the Fed Tips with Tim Duy and listen to the podcast by clicking on the link.

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Federal Reserve expert Tim started blogging about Fed monetary policy in 2005 and caught the attention of Bloomberg and other market specialists. Now, he’s a respected commentator in the field, analyzing the likes of key employment reports, interest rate hikes and inflation targets.

Tim recommends temporary hiring as a leading indicator for traders to watch. ‘Firms are more likely to lay off their temporary help workers first before moving to permanent workers,’ he explains. ‘And on the other side, because firms are never really sure if the rebound is for real or not, they tend to hire those temporary workers first.’

The measure being weaker in the last few months is consistent with stories we’ve heard on slowing economic activities, particularly in the manufacturing sector, Duy adds. ‘A lot of these jobs are tied to the manufacturing sector and become more cyclically attached to that sector, so I think we’re seeing a pattern of softer temp help numbers than we’ve seen in other slowdowns such as in 2015 or 2016.’

Bearish Monetary Policy Commentary

He also notes that a lot of the bearish commentary on monetary policy can often be taken with a grain of salt. ‘You have to have something in your analysis that recognizes that downturns have tended to be fairly shortlived and upturns really drive most of the market activity,’ he says.

Tim reinforces that the Fed exists in part to prevent the economy falling into a hole. ‘People forget there’s a major entity out there that is tasked with preventing the economy from falling into the recession that so many people fear.’

You have to be willing to move ahead of any real downturn in the economy, he adds. ‘The yield curve is a long leading indicator, which means it could be over a year, or two years before you saw a recession.

‘So by definition the economy’s still doing well, you’re ahead, you’re still far from the peak of the business cycle, and the data in general will be good, so it’s hard for the Fed to reverse direction on the rate hikes very easily given the economic outlook and data is fairly solid.’

How high will inflation get?

Tim believes the Fed has been fighting what he calls a ‘phantom inflation menace’, pointing out we have never seen inflation rise enough in this cycle or the last 20 years to have a ‘1970’s worry’ of the direction of inflation.

‘We often forget that we look at these inflation forecasts and we have arguments over how high inflation is going to get; we’re looking at 25 basis points within a 2.0% target,’ he says.

‘Sometimes I worry the Fed doesn’t recognise that they have plenty of space. This isn’t 1968 where inflation kicked up a lot and they got lost in the process. Here, the probability of having these sharp jumps in inflation that the Fed has to react to is fairly small.’

The real concern, he says, is when policymakers become very worried about inflation they tend to hold interest rates higher than they should for longer than necessary.

‘That’s where I think your primary risk of a policy area is going forward. Right now we’re fortunate the Fed did back off rate hikes fairly aggressively in the first three months of this year.’