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FOMC & U.S. Jobs Preview

01/29/2013

Tomorrow’s first Federal Open Market Committee (FOMC) meeting of 2013 will conclude with an afternoon statement release. There is no press conference associated with this meeting. The next FOMC meeting, March 19-20, will conclude with a press conference by Fed Chairman Ben Bernanke.
 
This week’s meeting brings a change to the composition of FOMC’s voting members. No longer voting are “hawks” Charles Plosser, Jeffrey Lacker, and Richard Fisher. Two pure doves are being added, Eric Rosengren (Boston Fed President) and Charles Evans (Chicago Fed President). St. Louis Fed President James Bullard, with a neutral bias, is a new voting member, as is the very hawkish Kansas City Fed President Esther George.
 
Investors can expect tomorrow’s meeting to be framed as more of a follow up to the Fed’s December 12 policy shift toward target-based guidance. At that meeting the FOMC stated it would maintain the current rate range of 0 to 0.25%, as long as the unemployment rate remains above 6.5%. Inflation was the second target, with the rate range staying in place as long as inflation remains below 2.5% and long-term inflation expectations remain well anchored.
 
I do not expect any monetary policy shift at tomorrow’s meeting. However, I expect a contentious internal debate that will be revealed when the FOMC minutes are released on Wednesday, February 20, 2013. In the wake of those minutes, the market will perceive a degree of uncertainty as to whether the target guidance is truly the mechanism to end the asset purchase program or if the anticipation of reaching those targets is actually the mechanism. 
 
The hawkish component of the FOMC led by new committee member Esther George can point toward the recent improvement in initial jobless claims (Figures 1.1 and 1.2) as evidence that the targets will be achieved quickly and further asset purchases are not warranted. I suspect the dovish component of the FOMC will remain focused on the wide gap between the actual unemployment rate and target guidance of 6.5%. However, the real motivation for the dovish camp, and of deeper concern, is the perceived global currency devaluation race led by the Bank of Japan.
 
If this all sounds confusing to investors, I maintain it is. The transparency the FOMC has attempted to present to markets over the past few years has reached a confusing extreme.
 
What might matter most to investors this week is Friday’s U.S. labor report. For the first time in recent memory, I suspect the markets need a positive upside surprise to expectations. The recent strong improvement in weekly jobless claims has elevated sentiment toward labor conditions significantly. A Friday labor report that mirrors last month’s +155,000 headline and +168,000 private figures will be disappointing and neutralize the positive sentiment surrounding recent weekly jobless claims.     
 
Figure 1.1 U.S. Initial Jobless Claims, April 2007 to Present

Source: Bloomberg
 
Figure 1.2 U.S. Initial Jobless Claims 4-Week Moving Average, 2008 to Present

Source: Bloomberg

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