Dollars and Jens
Tuesday, January 30, 2007
FOMC meeting started today, finishes tomorrow. The smart money says the fed funds target, constant since June, stays at 5.25%.

Mind, there is some difference of opinion as to what the course will be in the next few months, and what the concerns should be.
Call it the Federal Reserve's new conundrum: If the U.S. economy has slowed as much as some data suggest, why is the labor market still so strong?

Chairman Ben S. Bernanke and his colleagues are debating the significance of an unemployment rate that's near a five-year low and 2006 job growth that's almost as strong as the prior year's. Either the labor market is lagging behind the slowdown by a few months, or the economy is stronger than official numbers suggest.
A tight labor market is only a problem for the fed if it starts driving wages up faster than productivity. Unit labor costs have been running in the 2-3% range, above the quasi-official inflation target range, but not so much that, if you expect a slowdown, you feel the need to get ahead of inflation on the basis of nothing else. So here's the something else: the spread between 5 year nominal bond rates and 5 year inflation indexed bond rates has widened above 2.35% for the first time since September, after dipping near 2.1% in the meantime. On account of these things are indexed to the CPI, which overstates inflation by about half a point, 2.35% is actually consistent with the comfort range, but if you subscribe, as I do, to a sort of expectations-augmented expectations-augmented Phillip's curve view of the world, this backtracking can be something of a concern with the labor market as tight as it is.

Well, I titled this post "calendar", and should finish the observation I had in mind when I started this post: the rest of this week is a busy three days of data release. Tomorrow morning, six hours before the release of the FOMC statement, we get the advance release of 4Q GDP growth. Thursday morning is the NIPA report — income and personal consumption expenditures, including the price index for the latter. Friday morning is the employment report. Thing is, sometimes the fed gets these things before their official release; they will almost certainly have most of the NIPA data and probably a good idea what payrolls will look like before they move. If the Fed were to surprise us tomorrow — and, frankly, I think they're more likely to hike rates than to cut them — it might be an early indicator to us that something suggesting economic strength is likely to be reflected in the next couple releases.

One more thing, while I'm here: the GDP report will not indicate that the U.S. economy has slowed.

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