I really Don’t Want To

..but I guess I have to weigh in.

The force fed issue of the day - prior to Hebralife - is the labor market and the Fed. A vocal camp has emerged under the improving wages data (suspect by the way its calculated but lets leave that ) and the path of future rate hikes. Here's Evan Soltas, head cheerleader for the Tight Labor Myth:

http://esoltas.blogspot.com/2014/03/trading-in-your-feathers.html

and from his followers:

http://marginalrevolution.com/marginalrevolution/author/tyler-cowen

I have avoided the issue because of my long held view that I don't believe in the Phillip's Curve so I can't believe in a backward sloping one. But, lets break down the argument to the promulgated idea: The labor market is secretly tight, that is driving wages up, popping up Quits which are a solid indicator of Fed rate hikes.

The futures market pricing of these hikes is only important in context of how wrong the projected path turns out to be. The idea that "market participants expect the Fed to cross its own estimate of full employment with its policy rate at zero. That's extraordinary." Is incorrect.

First, The Death Star Rate could easily be 25bp by then and IOER and FF would flatten around that level. This may fit the semantic range of ZIRP but clearly is not zero. And could be higher. More importantly, the concept makes the fatal mistake of equating low with easy. The Funds rate (again-NOT the measure to watch now) routinely traded below 2% in the 1950's without carrying the label of extraordinary. The 70s experience continues to distort views of high borrowing rates as the norm.

Secondly, The tilt of policy - easy, neutral, tight - is the concern of the CB, not the level of rates. A CB can be "too tight" at 1% or "too loose" at 5. Long time readers know were I stand on this. Policy is not as accommodating as perceived because of the demand side. The FG gambit is predicated on the notion that policy would shift to "easier" - and entrench the recovery - as credit demand increases, rather than allow market forces to choke it off early. Quit rates are good anecdotal evidence of confidence not labor slack.

The Futures Strips are already adjusting in, out, back in to the changing data landscape and FOMC Member jawboning.  As we noted today, EDZ15 is experiencing a volume surge reflecting almost 6 months of more rapid adjustment. The Fed is always "behind" and will lean to that intent more so in this cycle. So what is the beef? Is the Tight Labor/Hike Sooner Cult advocating a pre-emptive policy adjustment? Have they bought into the long held Policy Bear's critique that a rampant inflation is the ultimate QE destination? Do they see some exploitable anomaly in forward prices (I'm listening) ?

My interactions with people from New York to California do not lead me to subscribe to the tight labor story. Turning away from a huge swath of middle America whose skill set is not in line with technology does not cease them from existence. Labor, especially highly skilled labor, is taking on a location characteristic similar to real estate. Mortgage debt is being outpaced by Education debt in a logical yet dangerous chase. (Mtge -75B for 2013, Student Loans +61B )

Here's a thought experiment: If the Funds Rate (ugh, I'll be glad when we all move on) were a freely determined rate, where would Soltas (et al) have it trade? There's certainly no shortage of labor in the half- baked economics sector.

 

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