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Weekly Economic Commentary


Different Opinions on Near Term Monetary Policy Prevail Within the FOMC

April 12, 2012

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Fed officials have voiced different opinions about the direction of monetary policy in the past two days. Among FOMC members who are wary of the current stance of Fed policy, President Kocherlakota of the Minneapolis Fed indicated the Fed needs to commence reversing the extraordinary accommodation in the next six to nine months.

At the other end of the spectrum, Fed Vice Chair, Janet Yellen’s views are:

"I consider a highly accommodative policy stance to be appropriate in present circumstances. But considerable uncertainty surrounds the outlook, and I remain prepared to adjust my policy views in response to incoming information,"

"In particular, further easing actions could be warranted if the recovery proceeds at a slower-than-expected pace, while a significant acceleration in the pace of recovery could call for an earlier beginning to the process of policy firming than the FOMC currently anticipates."

President Dudley of the New York Fed described the decision pertaining to easing of monetary policy as follows:

"QE3 is all about cost and benefits," Dudley said in response to a question at the Center for Economic Development in Syracuse. "If the economic outlook were to worsen... then the benefits of doing more (QE) would increase."

Atlanta Fed President Dennis Lockhart’s opinion runs along these lines:

"I'm somewhat reticent to consider another round of quantitative easing at this time," Lockhart told a press briefing on the sidelines of a conference sponsored by his bank at Stone Mountain, Georgia.

"I view it as a policy that would respond more to a fairly dramatic negative change of direction in the economy," said Lockhart, a 2012 voting member of the policy-setting Federal Open Market Committee.

Of these members of the FOMC, the Dudley, Yellen, and Lockhart are voting members and Kocherlakota is a non-voting member. The bottom line for April 24-25 FOMC meeting is that the Fed is most likely to tweak the policy statement of March slightly and maintain the current monetary policy stance.

Jobless Claims, Wholesale Prices, and Trade Gap – Mixed Message

Initial jobless claims rose 13,000 to 380,000 during the week ended April 7, putting the four-week moving average back at 368,500 after posting readings below this level in the past two weeks. Continuing claims, which lag initial jobless by one week, fell 98,000 to 3.251 million. The soft payroll gains in March and the currently weekly gain in claims support the view that labor market conditions are improving only gradually.

DEC 4/12/2012 Chart 1

The Producer Price Index (PPI) of Finished Goods held steady in March vs. a 0.4% jump in the prior month. The energy price index declined 1.0% in March, while the food price gauge advanced 0.2% following three monthly declines. The core PPI, which excludes food and energy, moved up 0.3% in March to mark the fifth monthly gain. Higher prices for light trucks (+0.7%), passenger cars (+0.8%), and detergent were the major culprits for the increase of the core PPI. The Producer Price Index for Finished Goods and the core PPI do not present an inflationary threat. The PPI shows a distinct decelerating trend (see Chart 2) and the core PPI is stabilizing. These trends are supportive of the Fed’s easy policy stance and allow the Fed to watch-and-wait.

DEC 4/12/2012 Chart 2

DEC 4/12/2012 Table 1

The trade deficit narrowed to $46 billion in February from $52.5 billion January. The improvement in the trade gap reflects a decline in inflation adjusted imports (-3.9%) and a smaller drop in exports (-1.0%) compared with imports. Imports of petroleum products fell 7.8% and that of consumer goods excluding food and autos declined 6.2%. Non-petroleum imports edged down 2.9% during February, after posting gains in December and January. The January-February trade numbers point to a slightly smaller trade shortfall in the first quarter barring a very large widening of the March trade gap.

DEC 4/12/2012 Chart 3

The U.S trade deficit vis-à-vis China (-$19.4 billion vs. -$26 billion in January), Euro area (-$5.8 billion vs. -$7.6 billion in January) and Canada (-$2.8 billion vs. -$4.9 billion in January) narrowed in February, while it widened with respect to Japan (-$7.0 billion vs. -$6.2 billion in January) and Mexico (-$5.8 billion vs. -$4.2 billion in January)

DEC 4/12/2012 Table 2

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.