In Portfolioticker today
Today at the stock market
“U.S. stocks closed lower on Wednesday in a rocky session after the release of the minutes from the Federal Reserve’s January meeting pushed yields on the benchmark 10-year U.S. Treasury note to a four-year high.
After the Fed left interest rates unchanged in Jan 2018, minutes showed the Federal Open Market Committee (FOMC) grew more confident in the need to keep raising rates, with most believing inflation would perk up amid an improving economic landscape.
Stocks initially reacted positively, with each of the major Wall Street indexes touching session highs. Stocks began to pare gains, however, as bond yields climbed to a 4-year high of 2.957% on the likelihood of further rate increases this year.
“The Fed meeting minutes indicated Fed members weren’t too worried about inflation, so that was music to the market’s ears,” said Michael Arone, Chief Investment Strategist at State Street Global Advisors in Boston. “Since then the market is recognizing the meeting happened at the end of January and since then we have had the strong jobs report, the average hourly earnings pickup, the CPI figures and they also said it is going to be appropriate to raise rates.”
Expectations for a quarter-point hike at the Fed’s next meeting in Mar 2018 are currently 93.5%, according to Thomson Reuters data. The Fed has forecast 3 rate hikes in 2018.
After inflation worries knocked the S&P 500 down more than 10% from its 26 Jan 2018 high, stocks had rebounded in recent sessions as yields on the 10-year U.S. Treasury note had stabilized around the 2.9% mark. Even with the recent rally, the index has been unable to convincingly hold above its 50-day moving average, seen as a key support level.
“It is unusual for it to make that V-shaped recovery that it did and keep going,” said Jeff Zipper, managing director at the U.S. Bank Private Client Reserve in Palm Beach, Florida. “We keep hearing about a possible re-test of that bottom but we will see how it holds up.”
The prospect of higher rates and an unexpected fall in Jan 2018 U.S. existing home sales dented the real estate sector, off 1.81%. Other sectors seen as bond proxies due to their high dividend yields, utilities and telecoms, also dropped more than 1%.
Benchmark 10-year notes last fell 13/32 in price to yield 2.9408%, from 2.893% late on Tuesday.” Reuters
^ Market indices today (mouseover for 12 month view) Chart: Google Finance
|Index||Ticker||Today||Change||31 Dec 17||YTD|
|S&P 500||SPX (INX)||2,701.33||-0.55%||2,673.61||+1.03%|
^ USD and AUD denominated indices over the past 52 weeks Chart: Bunting
|Index||Currency||Today||Change||31 Dec 17||YTD|
Portfolio stock prices
Amazon closed on a record high of $1,482.92, up 0.99% on yesterday’s record $1,468.35.
|Stock||Ticker||Today||Change||31 Dec 17||YTD|
^ Bloomberg Dollar Spot Index (DXY) movements today (mouseover for 12 month view) Chart: Bloomberg
“Bloomberg’s Dollar Spot Index (DXY) dipped following the release of the minutes but then recovered. The DXY was last up 0.4% at a one-week high.
The USD has been weighed down this year by concerns that Washington might pursue a weak-dollar strategy, and by the perceived erosion of its yield advantage as other countries start to scale back their easy-money strategies. Confidence in the USD has also been shaken by mounting worries over the U.S. budget deficit.
But the USD finally appeared to be benefiting from rising U.S. bond yields, especially as the Treasury Department issues more debt in anticipation of increased federal spending and a higher deficit from last year’s tax overhaul.
The EUR edged 0.41% lower to USD 1.2286.
In Britain, an unexpected jump in the jobless rate weighed on the GBP, helping to send sterling down 0.51% to USD 1.3924.” Reuters
^ AUD movements against the USD today (mouseover for 12 month view) Chart: xe.com
Oil and Gas Futures
“Oil prices pared losses in post-settlement activity after data from the American Petroleum Institute showed a surprise draw in U.S. crude inventories. Traders had been expecting a rise. U.S. crude fell 0.76% to $61.32 per barrel, and Brent was last at $65.10, down 0.23% on the day.” Reuters
Prices are as at 15:49 ET
- NYMEX West Texas Intermediate (WTI): $61.13/barrel -1.07% Chart
- ICE (London) Brent North Sea Crude: $64.97/barrel -0.43% Chart
- NYMEX Natural gas futures: $2.65/MMBTU +1.45% Chart
AU: Construction Work Done (Prelim). Dec 2017
Press Release Extract [au_construction]
VALUE OF WORK DONE, CHAIN VOLUME MEASURES
The trend estimate for total construction work done rose 0.6% in the September quarter 2017.
The seasonally adjusted estimate for total construction work done rose 15.7% to $61,863.2m in the September quarter.
Building Work Done
The trend estimate for total building work done fell 0.2% in the September quarter.
The trend estimate for non-residential building work rose 0.7% and residential building work fell 0.8%.
The seasonally adjusted estimate of total building work done fell 0.4% to $27,621.8m in the September quarter.
Engineering Work Done
The trend estimate for engineering work done rose 1.5% in the September quarter.
The seasonally adjusted estimate for engineering work done rose 33.0% to $34,241.4m in the September quarter.”
Australian Bureau of Statistics, “8755.0 Construction Work Done (Prelim). Dec 2017“, 21 Feb 2018 (11:30 AEDT) More
AU: Wage Price Index. Dec 2017
Press Release Extract [au_wpi]
WAGE PRICE INDEXES
Australia/Sector (seasonally adjusted)
In the December quarter 2017 the Private sector index rose 0.5% and the Public sector index rose 0.6%. The All sectors quarterly rise was also 0.6%.
Through the year, the Private sector rise to the December quarter 2017 was 1.9%, the Public sector rose 2.4%, and All sectors rose 2.1%.
ABS Chief Economist Bruce Hockman said “The annual rate of wage growth has increased for the second consecutive quarter reflecting falling unemployment and underemployment rates, and increasing job vacancy levels.”
In the December quarter 2017, wages rose 0.5% for All sectors. Private and Public sector wages grew 0.4% and 0.6% respectively.
The All sectors through the year rise was 2.1%. Through the year Private sector growth (1.9%) continues to track below Public sector growth (2.4%).
Wage increases in jobs covered by enterprise bargaining agreements made the largest contribution to growth, as was the case in December quarter 2016.
In the December quarter 2017, Victoria and Queensland recorded the highest quarterly rise of 0.6%. Tasmania and the Northern Territory recorded the lowest quarterly rise of 0.2%.
Rises through the year ranged from 1.1% for the Northern Territory to 2.4% for Victoria.
In the Private sector, the quarterly rise of 0.6% for Victoria was the highest rise of all states and territories. The equal lowest quarterly rise of 0.2% was recorded by Queensland, Western Australia, Tasmania, Northern Territory and Australian Capital Territory.
Rises through the year in the Private sector ranged from 1.4% for the Northern Territory to 2.2% for Victoria and Tasmania.
In the Public sector, Queensland recorded the highest quarterly rise of all the states and territories (1.3%). The Northern Territory recorded the lowest of 0.1%.
Through the year, Victoria recorded the highest Public sector rise of 3.1%, and the Northern Territory recorded the lowest (0.6%). The through the year rise for the Northern Territory was the lowest recorded for any state, or territory in the history of the series.
Wage growth for jobs in the education and training, and health care and social assistance industries were the main contributors to the Australia level quarterly index growth.
In the Private sector, wholesale trade, retail trade, accommodation and food services, rental, hiring and real estate services and public administration and safety industries all recorded the equal lowest growth over the quarter (0.2%). The Information, media and telecommunications industry recorded the highest quarterly rise of 1.0%.
Rises through the year in the Private sector ranged from 1.4% for Mining to 2.6% for Health care and social assistance.
In the Public sector, electricity, gas, water and waste services recorded the lowest quarterly wages growth of 0.3%. Professional, scientific and technical services recorded the highest quarterly rise of 1.0%.
Rises through the year in the Public sector ranged from 1.9% for Professional, scientific and technical services to 2.9% for Health care and social assistance.”
Australian Bureau of Statistics, “6345.0 Wage Price Index. Dec 2017“, 21 Feb 2018 (11:30 AEDT) More
EU: Flash Eurozone Composite PMI. Feb 2018
Press Release Extract [eu_pmi]
- Flash Eurozone PMI Composite Output Index at 57.5 (58.8 in January). 3-month low.
- Flash Eurozone Services PMI Activity Index at 56.7 (58.0 in January). 2-month low.
- Flash Eurozone Manufacturing PMI Output Index at 59.5 (61.1 in January). 4-month low.
- Flash Eurozone Manufacturing PMI at 58.5 (59.6 in January). 4-month low.
Eurozone business activity continued to rise at a steep pace in February, albeit with the rate of expansion cooling from the near 12-year high recorded in January. Price pressures and employment growth also remained elevated, though likewise saw rates of increase ease slightly. Business optimism about the coming year meanwhile ticked higher.
The headline IHS Markit Eurozone PMI fell from 58.8 in January to 57.5 in February, according to the estimate, which is based on approximately 85% of usual final replies.
The slower growth of business activity reflected an easing in the rate of increase of new orders which, while elevated, slipped to a five-month low.
By country, growth in Germany came in at a three- month low, while in France the composite PMI moderated to the weakest for four months. However, in both cases the PMI readings remained at levels indicative of strong growth, close to recent seven-year highs. Business activity growth meanwhile also slowed across the rest of the eurozone, though still registered the second-largest expansion in nearly 12 years.
At the eurozone level, the goods-producing sector continued to record a faster pace of expansion than the service sector, though growth of output and new orders slowed in both cases. However, both sectors continued to enjoy the best periods of expansion seen for seven years.
Despite slowing, the sustained growth of new business was sufficiently strong to encourage companies to boost staffing levels to one of the greatest extents seen over the past 17 years. Service sector jobs growth remained at the joint- highest in a decade, while manufacturing payroll growth dipped further from recent 20-year record highs to a five-month low.
Backlogs of work continued to rise, indicating that firms on balance once again lacked sufficient capacity to meet demand. The increase was nonetheless the smallest for six months, reflecting the combination of recent hiring and slower inflows of new work.
Price pressures meanwhile remained elevated. The rate of input cost inflation and selling price inflation remained at levels exceeded only rarely since early-2011, dipping from January’s highs.
Higher prices were linked to improved pricing power amid stronger demand as well as incidences of upward salary pressures. The steeper rate of selling price inflation was seen in manufacturing, where average prices charged for goods at the factory gate showed the largest rise since April 2011, though service sector charges also showed the second-largest increase over the same period.
Future prospects meanwhile ticked higher. Companies’ optimism about the year ahead perked up for a third successive month to reach the joint- highest since comparable data were available in 2012. A moderation of future expectations in the manufacturing sector was offset by a more upbeat outlook in services.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
“February saw the eurozone’s growth spurt lose a little momentum, but the rate of expansion remains impressive, putting the region on course for its best quarter for almost 12 years.
“The PMI readings for the first two months of the quarter generally provide a reliable guide to official GDP growth, and indicate that the eurozone economy is expanding at a quarterly rate of 0.9% in the opening quarter of 2018.
“The service sector is enjoying its best growth spell for seven years and the manufacturing sector’s performance remains one of the strongest seen over the 20-year survey history.
“It remains to be seen if growth will continue to slow in coming months. However, a rise in business optimism about the year ahead to a joint-survey high bodes well, suggesting that companies are expecting the slowdown to be short-lived.
“Price pressures meanwhile remained elevated, in part because stronger demand has enabled more firms to raise their selling prices. However, some comfort can be gleaned from a slight easing in the overall rate of inflation compared to January’s recent high.””
IHS Markit, “IHS Markit Flash Eurozone PMI®: Eurozone growth pulls back from near 12-year high but remains elevated. Feb 2018“, 21 Feb 2018 More
US: Markit Flash Composite PMI
Press Release Extract [au_pmi]
- Flash U.S. Composite Output Index at 55.9 (53.8 in January). 27-month high.
- Flash U.S. Services Business Activity Index at 55.9 (53.3 in January). 6-month high.
- Flash U.S. Manufacturing PMI at 55.9 (55.5 in January). 40-month high.
- Flash U.S. Manufacturing Output Index at 56.1 (56.2 in January). 2-month low.
U.S. private sector companies experienced a marked improvement in business activity growth during February. This was highlighted by a rise in the seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index to 55.9, up from 53.8 in January and the highest reading for almost two-and-a-half years.
February data pointed to similarly sharp increases in both manufacturing production and service sector activity. The latter recorded a much stronger rate of expansion than at the start of 2018, helped by the largest rise in new work received by service providers since March 2015.
Stronger new business growth underpinned a robust upturn in private sector payroll numbers during February. The latest increase in staffing levels was the most marked since August 2015.
Confidence regarding the outlook for business activity over the next 12 months picked up to its strongest since May 2015. A number of survey respondents cited greater sales volumes at their business units and hopes of a sustained improvement in U.S. economic conditions.
Meanwhile, cost pressures continued to intensify in February, with the latest rise in average input prices the sharpest recorded since July 2013. Higher cost burdens and improving client demand contributed to the fastest rate of prices charged inflation for almost three-and-a-half years.
The composite index is based on original survey data from the IHS Markit U.S. Services PMI and the IHS Markit U.S. Manufacturing PMI.
IHS Markit U.S. Services PMI™
February data revealed a robust and accelerated expansion of U.S. service sector output. At 55.9, up from 53.3 in January, the seasonally adjusted IHS Markit Flash U.S. Services PMI™ Business Activity Index signalled the steepest rate of growth for six months. Moreover, the latest reading was one of the highest achieved since early-2015.
A continued rebound in new order volumes helped to support business activity growth during February. The latest upturn in new work received by service sector companies was the steepest since March 2015. Anecdotal evidence suggested that resilient business and consumer confidence had helped to boost sales volumes in the latest survey period.
Service providers sought to expand operating capacity by taking on additional staff in February.
The rate of job creation was the fastest since August 2017, but this did not prevent a further rise in backlogs of work across the service sector. Moreover, stronger demand helped to support an improvement in business expectations for the next 12 months. February data indicated that service sector business confidence reached its highest since May 2015.
Input costs meanwhile increased sharply in February, with the latest rise the strongest for around four-and-a-half years. Average prices charged by service sector firms increased at the fastest pace since September 2014.
IHS Markit U.S. Manufacturing PMI™
U.S. manufacturers reported a strong upturn in business conditions during February, which continued the positive trend seen at the start of 2018. At 55.9, up from 55.5 in January, the seasonally adjusted IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) pointed to the fastest improvement in overall business conditions since October 2014.
A sharp and accelerated rise in incoming new business helped to boost the headline PMI in February, while manufacturing production growth was little-changed since January. The latest rise in new order volumes was the steepest for around three-and-a-half years, which survey respondents attributed to greater sales to domestic clients alongside further export gains.
Improving manufacturing business conditions also reflected a robust rise in payroll numbers and sustained pre-production stock building in February. Meanwhile, there were signs of stretched supply chains, with delivery times from vendors lengthening for the fourteenth month running.
Greater demand for inputs and rising commodity prices contributed to a sharp rise in average cost burdens across the sector. The latest increase in manufacturing input prices was the fastest since December 2012. Efforts to alleviate pressure on operating margins led to the steepest rate of factory gate price inflation for just over four years in February.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
“Business activity growth accelerated markedly in February, suggesting the economy is growing at its fastest pace for over two years. The upbeat February PMI surveys are indicative of GDP rising at an annualised rate of 3.0%. Even faster growth is signalled for coming months. February saw the largest influx of new orders for almost three years, while business expectations about the year ahead jumped to the highest since May 2015. Such optimism encouraged firms to step up their hiring, with payroll growth reaching a two-and-a-half year high, underscoring the broad-based bullish mood across the business sector. On the downside, price pressures have intensified further. Costs are rising at the steepest rate for four- and-a-half years in the service sector with a five-year high seen in manufacturing. Inflation therefore looks set to accelerate alongside the upturn in the economy, as higher costs are passed on to consumers.””
IHS Markit, “Flash US Composite PMI. Feb 2018“, 21 Feb 2018 (09:45) More
US: Existing-Home Sales. Jan 2018
Press Release Extract [us_housing]
Existing-home sales slumped for the second consecutive month in January and experienced their largest decline on an annual basis in over three years, according to the National Association of Realtors®. All major regions saw monthly and annual sales declines last month.
Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, sank 3.2 percent in January to a seasonally adjusted annual rate of 5.38 million from a downwardly revised 5.56 million in December 2017. After last month’s decline, sales are 4.8 percent below a year ago (largest annual decline since August 2014 at 5.5 percent) and at their slowest pace since last September (5.37 million).
Lawrence Yun, NAR chief economist, says January’s retreat in closings highlights the housing market’s glaring inventory shortage to start 2018. “The utter lack of sufficient housing supply and its influence on higher home prices muted overall sales activity in much of the U.S. last month,” he said. “While the good news is that Realtors® in most areas are saying buyer traffic is even stronger than the beginning of last year, sales failed to follow course and far lagged last January’s pace. It’s very clear that too many markets right now are becoming less affordable and desperately need more new listings to calm the speedy price growth.”
The median existing-home price for all housing types in January was $240,500, up 5.8 percent from January 2017 ($227,300). January’s price increase marks the 71st straight month of year-over-year gains.
Total housing inventory at the end of January rose 4.1 percent to 1.52 million existing homes available for sale, but is still 9.5 percent lower than a year ago (1.68 million) and has fallen year-over-year for 32 consecutive months. Unsold inventory is at a 3.4-month supply at the current sales pace (3.6 months a year ago).
“Another month of solid price gains underlines this ongoing trend of strong demand and weak supply. The underproduction of single-family homes over the last decade has played a predominant role in the current inventory crisis that is weighing on affordability,” said Yun. “However, there’s hope that the tide is finally turning. There was a nice jump in new home construction in January and homebuilder confidence is high. These two factors will hopefully lay the foundation for the building industry to meaningfully ramp up production as this year progresses.”
First-time buyers were 29 percent of sales in January, which is down from 32 percent in December 2017 and 33 percent a year ago. NAR’s 2017 Profile of Home Buyers and Sellers – released in late 2017 – revealed that the annual share of first-time buyers was 34 percent.
According to Freddie Mac, the average commitment rate (link is external) for a 30-year, conventional, fixed-rate mortgage moved higher for the fourth straight month to 4.03 percent in January from 3.95 percent in December. The average commitment rate for all of 2017 was 3.99 percent.
“The gradual uptick in wages over the last few months is a promising development for the housing market, but there’s risk these income gains could be offset by the recent jump in mortgage rates,” said Yun. “That is why the pace of added new and existing supply in the months ahead is worth monitoring. If inventory conditions can improve enough to cool the swift price growth in several markets, most prospective buyers should be able to absorb the higher borrowing costs.”
Properties typically stayed on the market for 42 days in January, which is up from 40 days in December 2017 but down from a year ago (50 days). Forty-three percent of homes sold in January were on the market for less than a month.
Realtor.com®’s Market Hotness Index , measuring time-on-the-market data and listings views per property, revealed that the hottest metro areas in January were San Francisco-Oakland-Hayward, Calif.; San Jose-Sunnyvale-Santa Clara, Calif.; Vallejo-Fairfield, Calif.; Midland, Texas; and Colorado Springs, Colo.
NAR President Elizabeth Mendenhall, a sixth-generation Realtor® from Columbia, Missouri and CEO of RE/MAX Boone Realty, says Realtors® in several markets are reporting that the spring buying season appears to be starting early this year. “Those planning to buy a home this spring should look into getting pre-approved for a mortgage now and start having those serious conversations with their real estate agent on what they’re looking for in a home and where they want to buy,” she said. “With demand exceeding supply in most areas, competition will only heat up in the months ahead. Beginning the home search now could lead to a successful and less stressful buying experience.”
All-cash sales were 22 percent of transactions in January, which is up from 20 percent in December 2017 but down from 23 percent a year ago. Individual investors, who account for many cash sales, purchased 17 percent of homes in January, up from 16 percent both last month and a year ago.
Distressed sales – foreclosures and short sales – were 5 percent of sales in January, unchanged from December 2017 and down from 7 percent a year ago. Four percent of January sales were foreclosures and 1 percent were short sales.
Single-family and Condo/Co-op Sales
Single-family home sales declined 3.8 percent to a seasonally adjusted annual rate of 4.76 million in January from 4.95 million in December, and are now 4.8 percent below the 5.00 million pace a year ago. The median existing single-family home price was $241,700 in January, up 5.7 percent from January 2017.
Existing condominium and co-op sales rose 1.6 percent to a seasonally adjusted annual rate of 620,000 units in January, but are still 4.6 percent below a year ago. The median existing condo price was $231,600 in January, which is 7.1 percent above a year ago.
January existing-home sales in the Northeast declined 1.4 percent to an annual rate of 730,000, and are now 7.6 percent below a year ago. The median price in the Northeast was $269,100, which is 6.8 percent above January 2017.
In the Midwest, existing-home sales dipped 6.0 percent to an annual rate of 1.25 million in January, and are now 3.8 percent below a year ago. The median price in the Midwest was $188,000, up 8.7 percent from a year ago.
Existing-home sales in the South decreased 1.3 percent to an annual rate of 2.26 million in January, and are 1.7 percent lower than a year ago. The median price in the South was $208,200, up 4.3 percent from a year ago.
Existing-home sales in the West fell 5.0 percent to an annual rate of 1.14 million in January, and are now 9.5 percent below a year ago. The median price in the West was $362,600, up 8.8 percent from January 2017.”
National Association of Realtors, “Existing-Home Sales. Jan 2018“, 21 Feb 2018 More
US: FOMC Minutes. 30-31 Jan 2018
This was Janet Yellen’s last meeting before the chairmanship of the Federal Reserve’s Board of Governors was given to Jerome Powell.
Press Release Extract [us_fomc]
Statement on Longer-Run Goals and Monetary Policy Strategy
(As amended effective January 30, 2018)
The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee’s policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee’s goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. The Committee would be concerned if inflation were running persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants’ estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC’s Summary of Economic Projections. For example, in the most recent projections, the median of FOMC participants’ estimates of the longer-run normal rate of unemployment was 4.6 percent.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.
The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.
Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) provided a summary of developments in domestic and global financial markets over the intermeeting period. Financial conditions eased further over recent weeks with market participants pointing to increasing appetites for risk and perceptions of diminished downside risks as factors buoying market sentiment. In this environment, yields on safe assets such as U.S. Treasury securities moved up some while corporate risk spreads narrowed and equity prices recorded further significant gains. Breakeven measures of inflation compensation derived from Treasury Inflation Protected Securities (TIPS) moved up but remained low. Survey measures of longer-term inflation expectations showed little change. Judging from interest rate futures, the expected path of the federal funds rate shifted up over the period but continued to imply a gradual expected pace of policy firming. The deputy manager followed with a discussion of recent developments in money markets and FOMC operations. Year-end pressures were evident in the market for foreign exchange basis swaps, but conditions returned to normal early in 2018. Yields on Treasury bills maturing in early March were elevated, reflecting investors’ concerns about the possibility that a failure to raise the federal debt ceiling could affect the timing of principal payments for these securities. The Open Market Desk continued to execute reinvestment operations for Treasury and agency securities in the SOMA in accordance with the procedure specified in the Committee’s directive to the Desk. The deputy manager also reported on the volume of overnight reverse repurchase agreement operations over the intermeeting period and discussed the Desk’s plans for small-value operational tests of various types of open market operations over the coming year.
By unanimous vote, the Committee ratified the Open Market Desk’s domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System’s account during the intermeeting period.
Inflation Analysis and Forecasting
The staff presented three briefings on inflation analysis and forecasting. The presentations reviewed a number of commonly used structural and reduced-form models. These included structural models in which the rate of inflation is linked importantly to measures of resource slack and a measure of expected inflation relevant for wage and price setting—so-called Phillips curve specifications—as well as statistical models in which inflation is primarily determined by a time-varying inflation trend or longer-run inflation expectations. The briefings noted several factors beyond those captured in the models that appeared to have put downward pressure on prices in recent years. These included structural changes in price setting for some items, such as medical care, and the effects of idiosyncratic price shocks, such as the unusual drop in prices of wireless telephone services in 2017. The staff found little compelling evidence for the possible influence of other factors such as a more competitive pricing environment or a change in the markup of prices over unit labor costs. Overall, for the set of models presented, the prediction errors in recent years were larger than those observed during the 2001–07 period but were consistent with historical norms and, in most models, did not appear to be biased.
The staff presentations considered two key channels by which monetary policy influences inflation—the response of inflation to changes in resource utilization and the role of inflation expectations, or trend inflation, in the price-setting process. In part because inflation was importantly influenced by a number of short-lived factors, the effects of current and expected resource utilization gaps on inflation were not easy to discern empirically. Estimates of the strength of those effects had diminished noticeably in recent years. The briefings highlighted a number of other challenges associated with estimating the strength and timing of the linkage between resource utilization and inflation, including the reliability of and changes over time in estimates of the natural rate of unemployment and potential output and the ability to adequately account for supply shocks. In addition, some research suggested that the relationship between resource utilization and inflation may be nonlinear, with the response of inflation increasing as rates of utilization rise to very high levels.
With regard to inflation expectations, two of the briefings presented findings that the longer-run trend in inflation, absent cyclical disturbances or transitory fluctuations, had been stable in recent years at a little below 2 percent. The briefings reported that the average forecasting performance of models employing either statistical estimates of inflation trends or survey-based measures of inflation expectations as proxies for inflation expectations appeared comparable, even though different versions of such models could yield very differ-ent forecasts at any given point in time. Moreover, although survey-based measures of longer-run inflation expectations tended to move in parallel with estimated inflation trends, the empirical research provided no clear guidance on how to construct a measure of inflation expectations that would be the most useful for inflation forecasting. The staff noted that although reduced-form models in which inflation tends to revert toward longer-run inflation trends described the data reasonably well, those models offered little guidance to policymakers on how to conduct policy so as to achieve their desired outcome for inflation.
Following the staff presentations, participants discussed how the inflation frameworks reviewed in the briefings informed their views on inflation and monetary policy. Almost all participants who commented agreed that a Phillips curve–type of inflation framework remained useful as one of their tools for understanding inflation dynamics and informing their decisions on monetary policy. Policymakers pointed to a number of possible reasons for the difficulty in estimating the link between resource utilization and inflation in recent years. These reasons included an extended period of low and stable inflation in the United States and other advanced economies during which the effects of resource utilization on inflation became harder to identify, the shortcomings of commonly used measures of resource gaps, the effects of transitory changes in relative prices, and structural factors that had made business pricing more competitive or prices more flexible over time. It was noted that research focusing on inflation across U.S. states or metropolitan areas continued to find a significant relationship between price or wage inflation and measures of resource gaps. A couple of participants questioned the usefulness of a Phillips curve–type framework for policymaking, citing the limited ability of such frameworks to capture the relationship between economic activity and inflation.
Participants generally agreed that inflation expectations played a fundamental role in understanding and forecasting inflation, with stable inflation expectations providing an important anchor for the rate of inflation over the longer run. Participants acknowledged that the causes of movements in short- and longer-run inflation expectations, including the role of monetary policy, were imperfectly understood. They commented that various proxies for inflation expectations—readings from household and business surveys or from economic forecasters, estimates derived from market prices, or estimated trends—were imperfect measures of actual inflation expectations, which are unobservable. That said, participants emphasized the critical need for the FOMC to maintain a credible longer-run inflation objective and to clearly communicate the Committee’s commitment to achieving that objective. Several participants indicated that they viewed the available evidence as suggesting that longer-run inflation expectations remained well anchored; one cited recent research finding that inflation expectations had become better anchored following the Committee’s adoption of a numerical inflation target. However, a few saw low levels of inflation over recent years as reflecting, in part, slippage in longer-run inflation expectations below the Committee’s 2 percent objective. In that regard, a number of participants noted the importance of continuing to emphasize that the Committee’s 2 percent inflation objective is symmetric. A couple of participants suggested that the Committee might consider expressing its objective as a range rather than a point estimate. A few other participants suggested that the FOMC could begin to examine whether adopting a monetary policy framework in which the Committee would strive to make up for past deviations of inflation from target might address the challenge of achieving and maintaining inflation expectations consistent with the Committee’s inflation objective, particularly in an environment in which the neutral rate of interest appeared likely to remain low.
Staff Review of the Economic Situation
The information reviewed for the January 30–31 meeting indicated that labor market conditions continued to strengthen through December and that real gross domestic product (GDP) expanded at about a 2½ percent pace in the fourth quarter of last year. Growth of real final domestic purchases by households and businesses, generally a good indicator of the economy’s underlying momentum, was solid. Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), remained below 2 percent in December. Survey-based measures of longer-run inflation expectations were little changed on balance.
Total nonfarm payroll employment increased solidly in December, and the national unemployment rate remained at 4.1 percent. The unemployment rates for Hispanics, for Asians, and for African Americans were lower than earlier in the year and close to the levels seen just before the most recent recession. The national labor force participation rate held steady in December; relative to the declining trend suggested by an aging population, this sideways movement in the participation rate represented a further strengthening in labor market conditions. The participation rate for prime-age (defined as ages 25 to 54) men edged up in December, while the rate for prime-age women declined slightly. The share of workers who were employed part time for economic reasons was little changed in December and was close to its pre-recession level. The rates of private-sector job openings and quits were little changed in November, and the four-week moving average of initial claims for unemployment insurance benefits continued to be at a low level in mid-January. Recent readings showed that gains in hourly labor compensation remained modest. Both the employment cost index for private-sector workers and average hourly earnings for all employees rose about 2½ percent over the 12 months ending in December.
Total industrial production increased over the two months ending in December, with broad-based gains in manufacturing, mining, and utilities output. Automakers’ schedules indicated that assemblies of light motor vehicles would likely move up over the coming months. Broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to further solid increases in factory output in the near term.
Real PCE increased strongly in the fourth quarter. Recent readings on key factors that influence consumer spending—including gains in employment, real disposable personal income, and households’ net worth—continued to be supportive of further solid growth of real PCE in the near term. Consumer sentiment in early January, as measured by the University of Michigan Surveys of Consumers, remained upbeat.
Real residential investment rose briskly in the fourth quarter after having declined in the previous two quarters. Both starts and issuance of building permits for new single-family homes increased in the fourth quarter as a whole, and starts for multifamily units also moved up. Moreover, sales of both new and existing homes rose in the fourth quarter.
Real private expenditures for business equipment and intellectual property increased at a solid pace in the fourth quarter. Recent indicators of business equipment spending—such as rising new orders of nondefense capital goods excluding aircraft and upbeat readings on business sentiment from national and regional surveys— pointed to further gains in equipment spending in the near term. Firms’ real spending for nonresidential structures rose modestly in the fourth quarter, as an increase in outlays for drilling and mining structures was largely offset by a decline in expenditures for other business structures. The number of crude oil and natural gas rigs in operation—an indicator of spending for structures in the drilling and mining sector—continued to edge up through late January.
Total real government purchases rose modestly in the fourth quarter. Increased federal government purchases mostly reflected a rise in defense spending, and the gains in purchases by state and local governments were led by an increase in construction spending in this sector.
The nominal U.S. international trade deficit widened further in November after widening sharply in October. Exports of goods and services picked up in November, while imports, particularly of consumer goods, increased robustly. Available data for goods trade in December suggested that import growth again outpaced export growth. All told, real net exports were estimated to be a substantial drag on real GDP growth in the fourth quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased about 1¾ percent over the 12 months ending in December. Core PCE price inflation, which excludes changes in consumer food and energy prices, was 1½ percent over that same period. The consumer price index (CPI) rose around 2 percent over the same period, while core CPI inflation was 1¾ percent. Recent readings on survey-based measures of longer-run inflation expectations—including those from the Michigan survey and the Desk’s Survey of Primary Dealers and Survey of Market Participants—were little changed on balance.
Incoming data suggested that economic activity abroad continued to expand at a solid pace and that this expansion was broad based across countries. In the advanced foreign economies (AFEs), real GDP in the euro area and the United Kingdom expanded at a moderate pace in the fourth quarter. In the emerging market economies (EMEs), Mexico’s economy rebounded after being held back by natural disasters in the third quarter. Economic growth remained solid in China but cooled off a bit in some emerging Asian economies after a very strong third-quarter performance. Inflation in both AFEs and EMEs picked up significantly in the fourth quarter, largely reflecting a boost from rising oil prices. Inflation excluding food and energy prices remained well below central bank targets in several economies, including the euro area and Japan.
Staff Review of the Financial Situation
Domestic financial market conditions eased considerably further over the intermeeting period. A strengthening outlook for economic growth in the United States and abroad, along with recently enacted tax legislation, appeared to boost investor sentiment. U.S. equity prices, Treasury yields, and market-based measures of inflation compensation rose, and spreads of yields on investment and speculative-grade nonfinancial corporate bonds over those for comparable-maturity Treasury securities narrowed further. In addition, the dollar depreciated broadly amid strong foreign economic data and monetary policy communications by some foreign central banks that investors reportedly viewed as less accommodative than expected.
FOMC communications over the intermeeting period were generally characterized by market participants as consistent with their expectations for continued gradual removal of monetary policy accommodation. The Committee’s decision to raise the target range for the federal funds rate at the December meeting was widely expected, and the probability of an increase in the target range for the federal funds rate occurring at the January meeting, as implied by quotes on federal funds futures contracts, remained essentially zero. Over the inter-meeting period, the futures-implied probability of policy firming at the March meeting rose to about 85 percent; respondents to the Desk’s Survey of Primary Dealers and Survey of Market Participants assigned, on average, similarly high odds to a rate increase at the March meeting. Levels of the federal funds rate at the end of 2018 and 2019 implied by overnight index swap rates moved up moderately.
The nominal Treasury yield curve shifted up over the intermeeting period amid an improved outlook for domestic and foreign economic growth. Yields on both 2- and 10-year Treasury securities moved up about 30 basis points. Measures of inflation compensation based on TIPS fell in response to the soft reading on core inflation in the November CPI release but subsequently moved up against the backdrop of an improving global growth outlook, higher commodity prices, depreciation of the dollar, and the stronger-than-expected reading on core inflation in the December CPI release. On net, inflation compensation moved up at both the 5-year and the 5-to-10-year horizons, and both measures returned to levels seen in early 2017 before the string of generally weaker-than-expected inflation readings.
Broad equity price indexes rose substantially over the intermeeting period, with investors pointing to a stronger global economic outlook and the supportive effect of the recently enacted tax legislation on risk sentiment. The VIX, an index of option-implied volatility for one-month returns on the S&P 500 index, increased but re-mained low by historical standards. Spreads of both investment and speculative-grade corporate bond yields over comparable-maturity Treasury yields declined slightly and remained well below their historical averages.
The FOMC’s decision at its December meeting to raise the target range for the federal funds rate was transmitted smoothly to money market rates. The effective federal funds rate held steady at a level near the middle of the target range except at year-end. While borrowing costs moved up briefly in offshore dollar funding markets over year-end, conditions in money markets were reported to be orderly. In line with recent year-end experiences, rates and volumes in the federal funds and Eurodollar markets declined, while in secured markets, rates on Treasury repurchase agreements increased. After year-end, pressures in money markets abated quickly and rates and volumes returned to recent ranges.
The broad nominal dollar index declined nearly 4 percent relative to its value at the time of the December FOMC meeting; the decline was most pronounced against AFE currencies, but the dollar depreciated notably against most EME currencies as well. EME equity prices registered substantial gains, in part supported by a significant rise in commodity prices; emerging market bond spreads narrowed moderately, and flows into EME equity and bond funds strengthened substantially.
Market-based measures of policy expectations and longer-term sovereign yields moved up in most AFEs. The Bank of Canada raised its policy rate at its January meeting, largely in response to better-than-expected economic data. The Bank of England, the Bank of Japan, and the European Central Bank (ECB) left their monetary policy stances unchanged, as expected. Nonetheless, the ECB president’s optimistic assessment of the euro-area economy at the press conference following the January meeting was interpreted by market participants as a signal that monetary policy would be less accommodative than expected. Following those remarks, the euro appreciated notably against the dollar and core euro-area sovereign yields moved higher. That said, market-based measures of policy expectations continued to indicate that investors anticipate a gradual pace of monetary policy normalization in the euro area.
Financing conditions for nonfinancial businesses and households remained generally accommodative over the intermeeting period and continued to be supportive of economic activity. Respondents to the January Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) reported easing standards and narrowing loan spreads for large and middle-market firms and attributed this easing to more aggressive competition from other bank or nonbank lenders. Net debt financing by investment-grade nonfinancial corporations turned negative in December, but the weakness appeared to reflect a softening in the demand for credit, possibly related to the anticipation of higher after-tax cash flows and repatriation of foreign earnings. In contrast, gross issuance of speculative-grade bonds and institutional leveraged loans remained strong. Credit market conditions for small businesses remained relatively accommodative despite sluggish credit growth among these firms. Credit conditions in municipal bond markets also remained accommodative.
In commercial real estate (CRE) markets, growth of loans held by banks slowed further in the fourth quarter, though CRE loans held by small banks and some types of CRE loans held by large banks—construction and land development loans in particular—expanded at a more robust pace. Financing conditions in the commercial mortgage-backed securities (CMBS) market remained accommodative as issuance continued at a robust pace and spreads on CMBS remained near their lowest levels since the financial crisis. Credit conditions in the residential mortgage market remained accommodative for most borrowers, though credit standards remained tight for borrowers with low credit scores or hard-to-document incomes. Mortgage rates increased in tandem with rates on longer-term Treasury securities but remained quite low by historical standards.
Conditions in consumer credit markets remained largely supportive of economic activity. Consumer credit increased notably in November, exceeding the more moderate volume of borrowing observed earlier in the year. Revolving credit expanded in November, while nonrevolving credit grew robustly, mainly driven by expansion in student and other consumer loans. In contrast, growth of auto lending slowed in recent months, consistent with the weakening demand for such loans in the fourth quarter as reported in the January SLOOS. For subprime borrowers, conditions remained tight, particularly in the market for credit cards and auto loans.
The staff provided its latest report on the potential risks to financial stability; the report continued to characterize the financial vulnerabilities of the U.S. financial system as moderate on balance. This overall assessment incorporated the staff’s judgment that vulnerabilities associated with asset valuation pressures continued to be elevated; asset valuation pressures apparently reflected, in part, a broad-based appetite for risk among investors.
The staff judged that vulnerabilities from leverage in the nonfinancial sector appeared to remain moderate, while vulnerabilities stemming from financial-sector leverage and from maturity and liquidity transformation continued to be viewed as low.
Staff Economic Outlook
The U.S. economic projection prepared by the staff for the January FOMC meeting was stronger than the staff forecast at the time of the December meeting. Real GDP was estimated to have risen in the fourth quarter of last year by somewhat more than the staff had previously expected, as gains in both household and business spending were larger than anticipated. Beyond 2017, the forecast for real GDP growth was revised up, reflecting a reassessment of the recently enacted tax cuts, along with higher projected paths for equity prices and foreign economic growth and a lower assumed path for the foreign exchange value of the dollar. Real GDP was projected to increase at a somewhat faster pace than potential output through 2020; the staff continued to assume that the recently enacted tax cuts would boost real GDP growth moderately over the medium term. The unemployment rate was projected to decline further over the next few years and to continue to run well below the staff’s estimate of its longer-run natural rate over this period.
Estimates of total and core PCE price inflation for 2017 were in line with the staff’s previous forecast. The projection for inflation over the medium term was revised up slightly, primarily reflecting tighter resource utilization in the January forecast. Total PCE price inflation in 2018 was projected to be somewhat faster than in 2017 despite a slower projected pace of increases in consumer energy prices; core PCE prices were forecast to rise notably faster in 2018, importantly reflecting both the expected waning of transitory factors that held down 12-month measures of inflation in 2017 as well as the projected further tightening in resource utilization. The staff projected that core inflation would reach 2 percent in 2019 and that total inflation would be at the Committee’s 2 percent objective in 2020.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. On the one hand, many indicators of uncertainty about the macroeconomic outlook remained subdued; on the other hand, considerable uncertainty remained about a number of federal government policies relevant for the economic outlook. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. The risks to the projection for inflation also were seen as balanced. Downside risks included the possibilities that longer-term inflation expectations may have edged lower or that the run of soft core inflation readings this year could prove to be more persistent than the staff expected. These downside risks were seen as essentially counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to move further above its potential.
Participants’ Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that information received since the FOMC met in December indicated that the labor market continued to strengthen and that economic activity expanded at a solid rate. Gains in employment, household spending, and business fixed investment were solid, and the unemployment rate stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy continued to run below 2 percent. Market-based measures of inflation compensation increased in recent months but remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.
Participants generally saw incoming information on economic activity and the labor market as consistent with continued above-trend economic growth and a further strengthening in labor market conditions, with the recent solid gains in household and business spending indicating substantial underlying economic momentum. They pointed to accommodative financial conditions, the recently enacted tax legislation, and an improved global economic outlook as factors likely to support economic growth over coming quarters. Participants expected that with further gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would remain strong. Near-term risks to the economic outlook appeared roughly balanced. Inflation on a 12-month basis was expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term. However, participants judged that it was important to continue to monitor inflation developments closely.
Participants expected the recent solid growth in consumer spending to continue, supported by further gains in employment and income, increased household wealth resulting from higher asset prices, and high levels of consumer confidence. It was noted that spending on dura-ble goods to replace those damaged during the hurricanes in September may have provided a temporary boost to consumer spending. In connection with solid growth in consumer spending, a couple of participants noted that the household saving rate had declined to its lowest level since 2005, likely driven by buoyant consumer sentiment or expectations that the rise in household wealth would be sustained.
Participants characterized their business contacts as generally upbeat about the economy; their contacts cited the recent tax cuts and notable improvements in the global economic outlook as positive factors. Manufacturers in a number of Districts had responded to increased orders by boosting production. Against a backdrop of higher energy prices and increased global demand for crude oil, a couple of participants revised up their forecasts for energy production in their respective Districts. Businesses in a number of Districts reported plans to further increase investment in coming quarters in order to expand capacity. Even so, several participants expressed considerable uncertainty about the degree to which changes to corporate taxes would support business investment and capacity expansion; according to these participants, firms may be only just beginning to determine how they might allocate their tax savings among investment, worker compensation, mergers and acquisitions, returns to shareholders, or other uses.
The labor market had strengthened further in recent months, as indicated by continued solid payroll gains, a small increase in average hours worked, and a labor force participation rate that had held steady despite the longer-run declining trend implied by an aging population. Many participants reported that labor market conditions were tight in their Districts, evidenced by low unemployment rates, difficulties for employers in filling open positions or retaining workers, or some signs of upward pressure on wages. The unemployment rate, at 4.1 percent, had remained near the lowest level seen in the past 20 years. It was noted that other labor market indicators—such as the U-6 measure of unemployment or the share of involuntary part-time employment—had returned to their pre-recession levels. A few participants judged that while the labor market was close to full employment, some margins of slack remained; these participants pointed to the employment-to-population ratio or the labor force participation rate for prime-age workers, which remained below pre-recession levels, as well as the absence to date of clear signs of a pickup in aggregate wage growth.
During their discussion of labor market conditions, participants expressed a range of views about recent wage developments. While some participants heard more reports of wage pressures from their business contacts over the intermeeting period, participants generally noted few signs of a broad-based pickup in wage growth in available data. With regard to how firms might use part of their tax savings to boost compensation, a few participants suggested that such a boost could be in the form of onetime bonuses or variable pay rather than a permanent increase in wage structures. It was noted that the pace of wage gains might not increase appreciably if productivity growth remains low. That said, a number of participants judged that the continued tightening in labor markets was likely to translate into faster wage increases at some point.
In their discussion of inflation developments, many participants noted that inflation data in recent months had generally pointed to a gradual rise in inflation, as the 12-month core PCE price inflation rose to 1.5 percent in December, up 0.2 percentage point from the low recorded in the summer. Meanwhile, total PCE price inflation was 1.7 percent over the same 12-month period. Participants anticipated that inflation would continue to gradually rise as resource utilization tightened further and as wage pressures became more apparent; several expected that declines in the foreign exchange value of the dollar in recent months would also likely help return inflation to 2 percent over the medium term. Business contacts in a few Districts reported that they had begun to have some more ability to raise prices to cover higher input costs. That said, a few participants posited that the recently enacted corporate tax cuts might lead firms to cut prices in order to remain competitive or to gain market share, which could result in a transitory drag on inflation.
With regard to inflation expectations, available readings from surveys had been steady and TIPS-based measures of inflation compensation had moved up, although they remained low. Many participants thought that inflation expectations remained well anchored and would support the gradual return of inflation to the Committee’s 2 percent objective over the medium term. However, a few other participants pointed to the record of inflation consistently running below the Committee’s 2 percent objective over recent years and expressed the concern that longer-run inflation expectations may have slipped below levels consistent with that objective.
Many participants noted that financial conditions had eased significantly over the intermeeting period; these participants generally viewed the economic effects of the decline in the dollar and the rise in equity prices as more than offsetting the effects of the increase in nominal Treasury yields. One participant reported that financial market contacts did not see the relatively flat slope of the yield curve as signaling an increased risk of recession. A few others judged that it would be important to continue to monitor the effects of policy firming on the slope of the yield curve, noting the strong association between past yield curve inversions and recessions.
Regulatory actions and improved risk management in recent years had put the financial system in a better position to withstand adverse shocks, such as a substantial decline in asset prices, than in the past. However, amid elevated asset valuations and an increased use of debt by nonfinancial corporations, several participants cautioned that imbalances in financial markets may begin to emerge as the economy continued to operate above potential. In this environment, increased use of leverage by nonbank financial institutions might be difficult to detect in a timely manner. It was also noted that the Committee should regularly reassess risks to the financial system and their implications for the economic outlook in light of the potential for changes in regulatory policies over time.
In their consideration of monetary policy, participants discussed the implications of recent economic and financial developments for the outlook for economic growth, labor market conditions, and inflation and, in turn, for the appropriate path of the federal funds rate. Participants agreed that a gradual approach to raising the target range for the federal funds rate remained appropriate and reaffirmed that adjustments to the policy path would depend on their assessments of how the economic outlook and risks to the outlook were evolving relative to the Committee’s policy objectives. While participants continued to expect economic activity to expand at a moderate pace over the medium term, they anticipated that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that labor market conditions would strengthen further. A number of participants indicated that they had marked up their forecasts for economic growth in the near term relative to those made for the December meeting in light of the strength of recent data on economic activity in the United States and abroad, continued accommodative financial conditions, and information suggesting that the effects of recently enacted tax changes—while still uncertain—might be somewhat larger in the near term than previously thought. Several others suggested that the upside risks to the near-term outlook for economic activity may have increased. A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate.
Almost all participants continued to anticipate that inflation would move up to the Committee’s 2 percent objective over the medium term as economic growth remained above trend and the labor market stayed strong; several commented that recent developments had increased their confidence in the outlook for further progress toward the Committee’s 2 percent inflation objective. A couple noted that a step-up in the pace of economic growth could tighten labor market conditions even more than they currently anticipated, posing risks to inflation and financial stability associated with substantially overshooting full employment. However, some participants saw an appreciable risk that inflation would continue to fall short of the Committee’s objective. These participants saw little solid evidence that the strength of economic activity and the labor market was showing through to significant wage or inflation pressures. They judged that the Committee could afford to be patient in deciding whether to increase the target range for the federal funds rate in order to support further strengthening of the labor market and allow participants to assess whether incoming information on inflation showed that it was solidly on a track toward the Committee’s objective.
Some participants also commented on the likely evolution of the neutral federal funds rate. By most estimates, the neutral level of the federal funds rate had been very low in recent years, but it was expected to rise slowly over time toward its longer-run level. However, the outlook for the neutral rate was uncertain and would depend on the interplay of a number of forces. For example, the neutral rate, which appeared to have fallen sharply during the Global Financial Crisis when financial headwinds had restrained demand, might move up more than anticipated as the global economy strengthened. Alternatively, the longer-run level of the neutral rate might remain low in the absence of fundamental shifts in trends in productivity, demographics, or the demand for safe assets.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in December indicated that the labor market had continued to strengthen and that economic activity had been rising at a solid rate. Gains in employment, household spending, and business fixed investment had been solid, and the unemployment rate had stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy had continued to run below 2 percent. Market-based measures of inflation compensation had increased in recent months but remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.
Members expected that, with further gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would remain strong. In their discussion of the economic outlook, most members viewed the recent data bearing on real economic activity as suggesting a modestly stronger near-term outlook than they had anticipated at their meeting in December. In addition, financial conditions had remained accommodative, and the details of the tax legislation suggested that its effects on consumer and business spending—while still uncertain—might be a bit greater in the near term than they had previously thought. Although several saw increased upside risks to the near-term outlook for economic activity, members generally continued to judge the risks to that outlook as remaining roughly balanced.
Most members noted that recent information on inflation along with prospects for a continued solid pace of economic activity provided support for the view that inflation on a 12-month basis would likely move up in 2018 and stabilize around the Committee’s 2 percent objective over the medium term. However, a couple of members expressed concern about the outlook for inflation, seeing little evidence of a meaningful improvement in the underlying trend in inflation, measures of inflation expectations, or wage growth. Several members commented that they saw both upside and downside risks to the inflation outlook, and members agreed to continue to monitor inflation developments closely.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members voted to maintain the target range for the federal funds rate at 1¼ to 1½ percent. They indicated that the stance of monetary policy remained accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessments of realized and expected economic conditions relative to the Committee’s objectives of maximum employment and 2 percent inflation. They reiterated that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Members also agreed to carefully monitor actual and expected inflation developments relative to the Committee’s symmetric inflation goal. Members expected that economic conditions would evolve in a manner that would warrant further gradual increases in the federal funds rate. They judged that a gradual approach to raising the target range would sustain the economic expansion and balance the risks to the outlook for inflation and unemployment. Members agreed that the strengthening in the near-term economic outlook increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate. They therefore agreed to update the characterization of their expectation for the evolution of the federal funds rate in the postmeeting statement to point to “further gradual increases” while maintaining the target range at the current meeting. Members continued to anticipate that the federal funds rate would likely remain, for some time, below levels that were expected to prevail in the longer run. Nonetheless, they again stated that the actual path for the federal funds rate would depend on the economic outlook as informed by the incoming data.”
US Federal Reserve, “Minutes of Federal Open Market Committee 30-31 Jan 2018“, 21 Feb 2018 More
Nikkei Flash Japan Manufacturing PMI. Feb 2018
Press Release Extract [jp_pmi]
- Flash Japan Manufacturing PMI® edges lower to 54.0 in February (54.8 in January).
- Output and new orders both grow at slowest pace since October 2017.
- Employment growth accelerates to 11-year high.
Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said:
“February Japan flash PMI data is a fairly mixed bag overall. On the one hand, output and new business inflows increased to weaker extents, while recent yen appreciation has coincided with slower new export order growth. Furthermore, a number of panellists indicated that the stronger currency had prompted them to lower prices to overseas customers. Indeed, further yen strengthening will create unwanted drag on inflationary pressures.
“That said, employment growth accelerating to an 11- year high signals confidence that expansionary output and demand trends will continue for the time being.””
IHS Markit, “Nikkei Flash Japan Manufacturing PMI®: Japanese manufacturing sector improves to softer extent. Feb 2018“, 21 Feb 2018 More
^ JPY movements against the USD over the past month (mouseover for inverse) Chart: xe.com
Stockmarket: Nikkei 225
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^ CNY movements against the USD over the past month (mouseover for inverse) Chart: xe.com
China’s stock market remains closed for the Lunar New Year Holiday.