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In coming months if inflation falls, labor market stays stable, no further rate cuts will be needed.
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More worried about inflation remaining stubbornly high.
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If see further material cooling in labor market, cutting rates could be appropriate.
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Current policy stance may be very close to neutral, providing little restraint.
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Cautiously optimistic current policy stance will get inflation down to 2%, sustain balanced labor market.
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Not fully confident inflation is heading all the way back to 2%.
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Economic activity has rebounded strongly.
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Last year’s rate cuts were insurance against labor market cooling, additional risk on inflation.
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I anticipate progress on inflation this year; have already seen some tentative signs.
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Labor market stabilizing, downside risks have meaningfully dissipated.
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Inflation has been above 2% target for nearly 5 years.
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Should provide central clearing for Fed’s standing repo operations.
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Real Fed funds rate now sits squarely within range of neutral rate estimates.
There is the start of the Fed laying the groundwork for holding rates. That would create a real headache for Warsh.but it will all depend on the data, starting with tomorrow’s non-farm payrolls report.
At the moment, the market is sniffing out a weakening US economy and that has yields lower and the US dollar under pressure. A three-year auction just went off at 3.518%, which was fractionally below what the market was expecting.
The dollar is particularly soft today against the yen in the second day of USD/JPY selling following the election of Takaichi’s party to a super-majority in the Lower House. That strong mandate has created a mini-boom in Japanese stock markets.
Beyond the US jobs report, the market will focus on Friday’s CPI report as we try to get a sense of the direction of inflation. If jobs are weak but inflation is high, that will create a particular headache at the FOMC.
This article was written by Adam Button at investinglive.com.