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By HaleStewart August 21, 2016 7:46 am
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US Bond Market Week in Review: Fed President Williams Is Clearly A Hawk

     Last week, I wrote about Fed Chair Yellen, who is clearly in the dovish camp.  This week I’ll focus on San Francisco Fed President Williams, whose recent speech places him firmly in the hawkish camp.

      Williams focuses exclusively on the employment and inflation, clearly sticking to the Fed’s dual mandate of “price stability and full employment.”  He made the following observations about employment:

Our goal is not to have an unemployment rate of zero, instead, it’s to be near the “natural rate” of unemployment: That’s the rate we can expect in a healthy economy. I see that number as about 5 percent, which means that with the unemployment rate at 4.9 percent, we’re right on target. The unemployment rate is obviously not the only measure of labor market health, but the multiple indicators tend to move together and are sending similar signals, with almost universal improvements across them all. Even the metric many people have been worried about, the labor force participation rate, is not the 21st century breakdown some people have feared; in fact, it’s back pretty close to what I see as normal. The participation rate takes the labor force and divides it by everyone in the United States over the age of 16, which covers a lot of people who aren’t working or looking for a job for perfectly normal reasons; overall, the low participation rate can be explained by demographic factors and longer-term trends, such as baby boomers retiring and young people staying longer in school.1

During this recovery, the low unemployment rate has become less important to analysts, largely due to the dropping labor force participation rate.  However, Williams addresses this dichotomy convincingly.  He first notes that the actual unemployment rate is more or less at the level widely believed to be “full employment.”  He then notes two well-documented reasons are behind the drop in the participation rate: baby-boomer retirement (which demographers have been anticipating for the last 15-20 years) and the increased educational enrollment of younger people.  Two points he doesn’t address are the lower numbers of individuals who are marginally attached to the labor force and those who are working part-time for economic reasons; both of these numbers are still below the post-2009 trough levels and each point to weaker labor utilization levels.  While he doesn’t specifically state this, Williams probably assumes that utilization numbers will continue to improve so long as the labor market remains at or near full employment.

     Turning to inflation, Williams notes:

Turning to the other side of the ledger, inflation is on course to meet our 2 percent goal. Although it’s been persistently below target over the past several years, recent data look more favorable. Over the past year, the strengthening of the dollar and falling energy prices have pushed inflation down, but these influences should fade over time. To cut through some of the noise, it’s useful to look at measures of inflation that strip out volatile prices and provide a clearer view of the underlying trend. Those measures suggest that underlying inflation is in the 1½ to 1¾ percent range. We’re not quite at our target, but the strength of the labor market should help us along.  

Actually, the latest core reading from the BLS was 2.2%.  This is consistent with the Cleveland Fed’s inflation calculation (top table) and the Dallas Fed’s trimmed mean CPE calculation (bottom table): 

     Williams obviously looks at a variety of other statistics to draw his conclusion about policy.  However, he frames everything in the dual mandate perspective.  And, based on that, he definitely falls into the hawk camp.

 

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