The Fed View
Stanley said he expects the unemployment rate to be at 8.5 percent by year-end. "I think that's meaningful. When the unemployment rate was at 9.8 percent, people were saying where the Fed should stop easing," and that level was 9 percent, he said.
"Maybe the Fed doesn't think that way, and they don't have a target on the employment rate at which they won't ease," he said.
Goldman economists, in a note, said there's a chance the lower unemployment rate will impact the Fed's policy course, but they still believe the Fed will not hike rates until 2013.
"Our Fed rate view is certainly becoming a closer call. The lower unemployment rate makes the message from standard Fed 'reaction functions' more mixed than a few months ago, and a modest upward adjustment to the core inflation path would reinforce this," they wrote.
"In practice, it is hard to know whether one should adjust for the stance of fiscal policy, especially at a time when the positive effects of fiscal policy are already behind us and the stance is likely to turn tighter in coming years. But our estimated rules are starting to send a less unambiguous message that rate hikes should be delayed until 2013, and it would not be too surprising if the market tested our 'low for long' more in coming weeks," they wrote.
Bond yields are once again defying the Fed's easing efforts, as traders say the move is related to inflation worries and the better data. The Fed is in the midst of its "quantitative easing" program, under which it plans to buy $600 billion in Treasury securities by the end of the second quarter.
Yields have moved dramatically in the past week, even as the Fed buys securities. The yield on the 2-year rose to 0.785 percent, and the 10-year was at 3.674, its highest level in nearly 10 months. The Fed funds futures market is pricing in a hike of up to a half percent by January 2012, and a quarter percent in each of the next two quarters.
"There's concern in the market that the Fed might move sooner rather than later," said Jefferies Treasury strategist John Spinello, adding he doesn't think the market's testing the Fed yet. Jefferies does not expect the Fed to move on rates until 2012.
Rupkey says growth may end up not being as strong as some expect. He sees first quarter growth of 3.5 percent. "I'd be careful of 4 percent plus. Inventories are supposed to swing around.. We would have had 4 percent last quarter, if it wasn't for government spending going down," he said.
"One of the most important parts, consumer spending, I don't know if that's going to be there with the same speed..I think snow and gas prices might have taken a little bit off. I love the strong economy story, and I'd be the first to embrace 4 percent plus, but I think it's a stretch, so I'd take it slow," he said.
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