Perspectives Blog

A question for Jackson Hole

Zach Pandl, Portfolio Manager and Strategist | August 20, 2014

Fed officials have highlighted underemployment but offered little guidance about how this issue affects the policy outlook. Traditional tools like the Taylor Rule need to be recalibrated if the central bank focuses on a different measure of slack, so they offer little guidance to investors at the moment. We hope to learn more at this week’s Jackson Hole conference. A consensus among Fed officials holds that the standard U3 unemployment rate—no…

U.S. rates – An intriguing six point three

Zach Pandl, Portfolio Manager and Strategist | June 9, 2014

Fed and consensus unemployment forecasts are likely to come down after last week’s jobs report. It is not obvious what lower unemployment rate forecasts mean for U.S. monetary policy. June FOMC meeting should shed light on Fed’s worldview—in particular, whether the U3 unemployment rate still matters. The latest jobs report may look pretty bland on the surface, but I can assure you that it will generate plenty of intrigue among close observers…

Gaps, not growth

Zach Pandl, Portfolio Manager and Strategist | February 25, 2014

Monetary policy is primarily about “gaps” not growth: the Fed is trying to reduce spare capacity in the economy, not bring about a rapid expansion per se. Despite concerns over cyclical weakness in labor force participation, the unemployment rate is sending similar signals as most other output gap proxies. The output gap improved despite a relatively slow expansion, suggesting weak potential growth. While it’s far too soon to revise any medium…

Slack and inflation

Zach Pandl, Portfolio Manager and Strategist | July 21, 2014

Today’s low unemployment rate indicates modest slack in labor market, which implies earlier Fed rate hikes and/or more inflation risk. The decline in labor force participation in recent years now looks mostly structural. Investors should remain cautious around U.S. interest rate risk despite a solid first half of 2014. Excerpted from Zach Pandl’s newest whitepaper Structural weakness in labor force participation means there is less slack in th…

U.S. rates — Data dependence

Zach Pandl, Portfolio Manager and Strategist | June 23, 2014

Evidence of data dependency at the June FOMC meeting suggests policy will respond to unemployment and inflation surprises. We are more confident the Fed’s reaction function is (nearly) done moving. We therefore remain cautious about exposure to U.S. interest rate risk, especially at the middle of the yield curve. The June FOMC meeting contained a little bit for everyone and interest rates reacted only marginally after the announcements. But lo…

Labor market takes center stage

Zach Pandl, Portfolio Manager and Strategist | October 15, 2013

…ocused on an idea called the “efficiency wage theory”, which argues that firms set wages in an effort to promote worker morale and thereby improve productivity. For the economy as a whole this theory helps explain involuntary unemployment, because efficiency considerations move wages away from the market equilibrium. Some of her other work focused on topics like labor market turnover and the psychological effects of job loss. Yellen is also uniqu…

U.S. rates — play for growth

Zach Pandl, Portfolio Manager and Strategist | December 10, 2013

More signs that U.S. growth is accelerating; with 7% unemployment rate, look for qualitative communication changes at next FOMC meeting. Higher odds of December taper but we still think January is more likely (with possible hint in December press conference). We wonder whether front-end rates can remain anchored as growth picks up. The November employment report brought more positive news on U.S. activity, with a healthy gain in nonfarm payrol…