In his latest Fed Watch at the Economist's View Tim Duy lays out some reasons to consider the idea that the Fed may shift its policy away from additional easing.  He is not ready to predict a new course yet, but he points to a series of recent data reports that suggest an economic picture shifting faster than he expected.  First and foremost is the latest ISM manufacturing report--new orders increased 5.8 points.  But also the household savings rate appears to be slipping back down, and consumption has improved despite "the damage done to household balance sheets over the past three years":

Duy writes:

Against the backdrop of generally solid data (yes, homeownership rates continued to decline, but no one expected anything else), the headline gain of just 39k nonfarm payroll jobs was something of a slap in the face. The weak showing, however, was quickly discounted as a weather-related event. As is now well known, the household survey was also challenging to interpret due to new population benchmarks. Jim Hamilton has the story here, along with plenty of links to excellent insights on the topic. Cutting through the analysis, it seems that most are in agreement on one important point – the unemployment rate has made a dramatic drop in the past two months. The kind of dramatic drop that points to some real improvement in the labor market.

And yes, I know that we are still deep, deep in the hole on the labor market. But this is one of those “journey of a thousand miles begins with a single step” situations. We have just one solid quarter of real final demand behind us, and the early read on January data is reinforcing the importance of that demand. Sustain final demand anywhere near 7 percent growth – or even 4 to 5 percent – and labor market improvements will emerge in short order.

We aren’t there yet. I have already expressed concern that final demand will yield in the face of rising imports. But if the unemployment rate continues to drop at this pace, the Fed’s forecasts will quickly seem overly pessimistic. And that will turn Fed officials back to the issue they began with in 2010 – will they need to shrink the balance sheet sooner than later?

Read the full post here.