Little evidence that Fed's tightening has had material impact - BBH

Analysts at Brown Brothers Harriman explained that after they first suggested that the Fed would announce the beginning of its balance sheet operations at the September FOMC meeting, their confidence has grown.  

Key Quotes:

"A survey of prime dealers found they too have shifted to this view. Comments by officials have also been encouraging, and we expect Dudley's speech in the week ahead to be consistent with this. FOMC members may find comfort in this week's CPI report. July core prices likely rose 0.2%, which would be the fastest monthly pace since February. A 0.2% rise in the headline would bring it to 1.8% (from 1.6%).  

The slowdown in auto sales and cuts in production and employment announced is worrisome, but manufacturing employment is doing considerably better than last year. Through July, 12k new manufacturing jobs have been added each month on average. Last year, manufacturing employment fell by an average of one thousand a month. In July, 16k new manufacturing jobs were created, and June's one thousand gain was revised to 12k, which fully accounted for the upward revision in the national estimate.  

The broader jobs report also will probably be to the Fed's liking. The unemployment rate returned to its cyclical and multi-year low of 4.3%. The participation rate increased to 62.9% in July from 62.7% in May. Average hourly earnings rose 0.343% and were rounded down to 0.3%, but it is the strongest since last October. Jobs growth this year has averaged 184k, which is essentially unchanged from last year's 187k average. The diffusion index rose to 63.2 from 62.5, nearly nine index points above the recent low.  

The concerns from some corners that the Fed's tightening is premature rings hollow. Financial conditions have eased. The Chicago Fed's Financial Conditions measure fell to new cyclical lows at the end of July (-0.94) and is approaching the modern extreme recorded July 1993 (-1.02).  

Some are critical that the Fed should not be considering tightening given that inflation is below target and the robust jobs growth signals the existence of more slack than full employment would suggest. Full employment is not a directly observable phenomenon, and its importance is in the medium- and long-term.  

 Why shouldn't it be able to be overshoot in what is turning into one of the longest expansions on record? There is little evidence that the Fed's tightening has had a material impact."