Poole told us one data point doesn't make a difference. Kohn told us it can and minds can be changed in just a few days or weeks. The difference between the two rests on one distinction -- is it a single data point or one that fills in the last bits of a puzzle? Tomorrow morning's employment data is a filler that should reduce the number of two-handed economists at the Fed. The policy road map to March becomes more clear 8:30 tommorrow morning.
The headline numbers will be Nov employment and the revisions to Oct. Expectations for Nov is 75,000 to 100,000. As for the Oct revision, no one knows what to expect. Employment growth lags real growth, so those with opinions that matter to policy will examine hours worked for its leading possibilities.
Forget for the moment the probabilities in the market, as they are only the average of everyone's best guess given what everyone knows at the moment and that moment changes tomorrow morning.
Using some twisted logic based on recent Fed chatter, the road forward lays out this way. First, a strong or consensus number (consensus being the economists at the Fed) means the Dec statement looks remarkably like the October statement. Since we know, from Beckner, that there is alot of resistance to jumping in and dropping funds without a forewarning, a repeat of Oct in Dec means that Jan is the time for the statement shift and likelihood of an ease rolls out to Mar. In my opinion, if it rolls to Mar it rolls off the table.
A weaker number and the other one-handed view point comes in and shifts the statement or even, if weak enough, sets up an ease. To shift and not ease the FOMC has to let people know everything is fine, maybe not as fine as we thought, but not not fine enough to do anything right now.
As for the market and current pricing, here is what we know. The prices are all wrong as far as what terminal values will be. Fed goes or not, its 0 or 1 not 35%. Fed goes 50, not 25, if it goes. Prices will not end up at a 40% probability.
Bernanke, Poole, et al have told us that this will be a data driven Fed. The Fed goes for a ride tomorrow.
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Is the Fed data driven, or rear view mirror driven?
If the Fed has to wait for a weak number to justify ease, then it would most likely be too late to prevent a recession, one that is caused by the interest policy of the Fed. Perhaps the Fed is countin gon luck to save it this time?
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