Today's Hawkish Fed

Tim Duy's Fed Watch

Economist's View: Fed Watch: Still in the Game: The jobs report was mixed.... Yes, the headline reading of 121,000 net new hires in May argues for a pause at the next meeting. But the rest of the report argues for another 25bp. And, given last month's wave of hawkish rhetoric, caution suggests following the latter bet.... Some officials, convinced that economic growth is slowing and that inflation will settle down again soon, would really rather not raise the target this week for the 17th time in a row. Even those officials feel they have no choice because investors, shaken by recent inflation reports, fully expect them to do so....

But to blame the rate hike on investors "shaken by recent inflation reports" misses half the story--the policy half.... And while wages are up 3.9%, CPI headline inflation will post a greater y-o-y increase in June (the May number was 4.2%). In other words, real wages are down. Should we expect the Fed to hike rates when real wages are falling, or whenever they threaten to edge up? Is the goal to hold real wages constant? See Angry Bear for more on this criticism of Fed policy.

The Fed, I suspect, will not cozy up to these arguments.... I want to believe that the Fed will pause as they assess the magnitude of economic slowing. But I have been led down that road before, and am not ready to make that trip again. Instead, I suspect they will read this report as a sign that while the economy is slowing, the pace of activity remains strong enough to heighten inflationary pressures. True, we will get another employment report before the next FOMC meeting, as well as multiple reports on inflation, not to mention Q2 GDP as well as the minutes from the last FOMC meeting. And Fed officials may suddenly back away en masse from last month's inflation worries. But this employment report goes to the hawks.

Comments

[derek]

Increasing the profit for the providers of capital, and decreasing the wages for the providers of labor, are such consistent goals it's hard to believe anyone could miss the connection by accident. They go together like a (working) horse and a (fancy) carriage.

[dale]

How many new jobs does the US economy need each month to keep up with population growth? We used to hear that number but not so much any more.

Is this 121,000 keeping up or falling behind?

[anne]

There is Federal Reserve opinion that as little job creation as 100,000 a month is sufficient, where I would estimate close to 150,000 is necessary for healthy wage and benefit increases and to continually draw adults to the labor force as later in the 1990s. Job creation during the Clinton years was 235,000 a month with almost no inflation.

[anne]

The long term bond market seems to be telling us that we can do better than 121,000 jobs created a month with no problematic core inflation, but the Federal Reserve is likely content as is.

[anne]

Notice now and then the range of treasury interest rates. We have investors pricing in another short term interest rate increase, and low long term rates, rates so low the yield curve is flat as flat can be. The guess is a mild decline in growth, with the Fed ending the tightening cycle soon and well contained core inflation. International growth still seems quite healthy.

[anne]

http://flagship2.vanguard.com/VGApp/hnw/FundsByName

Vanguard Fund Returns
12/31/05 to 7/7/06

S&P Index is 2.3
Large Cap Growth Index is -2.1
Large Cap Value Index is 6.8

Mid Cap Index is 3.1

Small Cap Index is 5.0
Small Cap Value Index is 6.9

Europe Index is 13.8
Pacific Index is 2.7
Emerging Markets Index is 5.8

Energy is 16.0
Health Care is 2.9
Precious Metals is 28.3
REIT Index is 14.4

High Yield Corporate Bond Fund is 1.4
Long Term Corporate Bond Fund is -5.1

[anne]

How the game is played:

http://select.nytimes.com/2006/07/09/business/yourmoney/09gret.html

July 9, 2006

Is 'Total Pay' That Tough to Grasp?
By GRETCHEN MORGENSON

THE Business Roundtable published an 11-year analysis of pay practices at 350 of the nation's largest companies last week, aiming, it said, to set the record straight on executive compensation. Care to guess what this lobbying organization representing 160 chief executives of top United States companies concluded? That pay dispensed to those in the corner office is entirely justified by growth in the shareholder returns at the companies they run.

Using the roundtable's figures, chief executives' compensation — up only 9.6 percent annually from 1995 to 2005 — has not even kept pace with total stockholder returns of 9.9 percent at the companies the executives stewarded during the same period.

"We wanted to try and promulgate a consistent set of facts because a lot of what we have seen in the media on executive pay we felt was misleading," said Thomas J. Lehner, the roundtable's director of public policy, in an interview last week.

It sure is a relief that we can cross off greedy executives from our list of what's ailing America.

But wait. A closer look at the roundtable's data shows that it omitted a tidy pile of pay from its calculation. The study's figure for "total" executive compensation is anything but that.

Brian Foley, an expert in executive compensation who runs his own independent firm in White Plains, examined the roundtable analysis. "It really is disingenuous," he said.

For starters, the total pay figures exclude dividends paid to executives on their restricted stockholdings — not an inconsequential figure, in many cases.

The total shareholder return to which the roundtable compares executive pay does, however, include dividends. Apples and oranges.

The roundtable study also excludes what executives have made by cashing in stock options and restricted stock over the 11 years — enormous numbers, in many cases. Instead, the study counts only the value of the options and restricted stock received by the 350 executives on the dates the awards were made. Hide and seek.

If the stocks underlying these options fell after they were granted, of course, the executives would not have received any value from them. But because the study covers 1995 through 2005, it's a fair guess that executives at these companies exercised boatloads of options and banked huge gains. Ditto for restricted shares.

That the roundtable doesn't consider options and restricted shares to be real money is reminiscent of Silicon Valley executives arguing that options shouldn't be accounted for as an employee cost because their precise value was hard to calculate. Cute, but not credible.

Pension benefits, deferred compensation and money received in severance packages — serious lucre all — are also missing from the roundtable's calculation. Finally, the study's total pay figure includes only the targeted value of all other performance-based cash or stock awards granted executives, in addition to the options and restricted stock already considered. These values, of course, can be much lower than what companies actually dispense. Shell game....

[anne]

So, there we have it, the problem is we pay corporate management too little. I should have known. Any wonder why most analysts are not to be trusted further than you can throw a piano? There we have it, but I am training for piano throwing.

[old ari]

As a side note, Anne,I saw once on the Idiot Box the story of a man who built a Trebuchet, with which he was able to throw a piano, about 50 yards, or so.

[anne]

"Catapult," for we do not allow French on this site :)