Navigating Mixed Economic Signals With Cautious Monetary Policy

Key Quotes

"Well I don't make too much from any one individual report we try to look at the whole constellation of the pictures that comes together and it's great that we are getting that gold standard bls data back again um but I expected it and I think most participants expected that number to be a bit noisier given the government shutdown and given that they weren't able to be out there sampling a lot of data."

Beth Hammack, president of the Federal Reserve Bank of Cleveland, expresses caution regarding any single economic report, emphasizing the need to consider a broader range of data. Hammack indicates that recent data, while valuable, may contain noise due to external factors like a government shutdown, suggesting a more nuanced interpretation is required.

"On the pricing side I do hear that businesses have done a lot of work to try to maintain their costs and they've used technology of a variety of different sorts to try to help offset some of those pressures but their input costs continue to go up and that's something that they're feeling and it may mean that they're going to be raising prices again in the first quarter of next year as uh to to help offset some of those those input cost pressures that they felt."

Hammack shares insights from her conversations with businesses, noting that while many have employed technology to manage costs, rising input expenses persist. This suggests that businesses may need to increase prices in the near future to counteract these ongoing cost pressures.

"The labor market has been gradually cooling what I've seen is that um we had a huge a big shift over the late summer from the larger headline payroll numbers to these you know tens of thousands I think we're running somewhere around a 60 000 average over the past several months."

Hammack observes a cooling trend in the labor market, characterized by a significant decrease in the average monthly job creation numbers. This shift from larger payroll gains to tens of thousands indicates a gradual deceleration in employment growth.

"It's a challenging time for monetary policy we're being pressed on both sides of our mandate I think you've heard chair powell talk about there's no risk free path we are seeing a labor market that's been gradually cooling but it doesn't seem to me that we have signs of a more material movement around the corner."

Hammack describes the current environment as challenging for monetary policy, with pressures on both the employment and inflation mandates. She notes that while the labor market is cooling, there are no immediate signs of a significant downturn.

"The neutral rate is unobservable it's one of these tricky things for us as monetary policy makers because you do want to have some sort of a north star that you can judge policy against um but it's completely unobservable so it's it's a purely theoretical construct and the way that I think about it now the way that I thought about it when I was in markets really comes from just seeing how the economy is performing."

Hammack explains that the neutral rate, a theoretical benchmark for monetary policy, is unobservable and thus a challenge for policymakers. Her understanding of it is derived from observing the economy's performance rather than from a direct measurement.

"The action that was taken last week is really a technical adjustment we've said um the fed said back in 2019 that we wanted to operate in what we call an ample reserves framework an ample reserves regime that means that all the banks and financial institutions can have access to however many reserves they deem appropriate for them and we're helping to set monetary policy we're helping to govern interest rates based on administered rates rather than having to be in the market doing open market operations."

Hammack clarifies that the recent adjustment to the Federal Reserve's balance sheet is a technical change to maintain an ample reserves framework. This framework allows financial institutions to hold reserves as needed, enabling the Fed to manage interest rates through administered rates rather than active market operations.