Wednesday, December 17, 2014

Fed Funds Rate Will Likely Rise in 2015

The FOMC reaffirmed its view that the current zero to 0.25% target range for the federal funds rate remains appropriate for a “considerable time.” The committee noted that, “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.”

In the press conference, Chair Janet Yellen noted that almost all participants believe that it will be appropriate to begin raising the federal funds rate in 2015, and move toward the long-run objective of by 2017. The Committee’s forecasted median long-run federal funds rate is currently 3.75%.

In her remarks, Chairwoman Yellen said that the FOMC is unlikely to commence the normalization process of the federal funds rate for at least the next couple (2) meetings. She reiterated that the normalization is based on incoming information from economic indicators.

Chair Yellen noted that the effect of declining oil prices, on net, is positive for the U.S. economy. She said that the lower oil prices act like a tax cut, boosting consumer spending power. She also noted that the Committee sees the downward pressure on headline inflation from declining energy prices as transitory, and that they expect inflation to move back up toward their 2% objective over time.

The FOMC expects the economy to continue expanding at a moderate pace. Labor indicators are expected to move toward the Committee’s long-run objective, as the “underutilization of the labor resources continues to diminish.” However, Yellen noted that there continues to be room for further improvement in the labor market. Inflation has continued to run below the Committee’s long-run objective of 2%, partly reflecting decline in energy prices, but inflation is expected to rise toward the 2% objective “as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.” However, the Committee currently anticipates that, even after inflation and employment are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below what the Committee considers the long-run norm.

The Committee will maintain accommodative financial conditions by continuing the existing policy of reinvesting principal payments from its holdings of agency debt and agency MBS in agency MBS and of rolling over maturing Treasury securities at auction.

Read FOMC press release.
See Economic Projections.

CPI Declined in November, Mostly Due to Gasoline

The Consumer Price Index declined 0.3% in November on a seasonally adjusted basis, primarily due a decline in the index for gasoline, the U.S. Bureau of Labor Statistics reported. The all items index increased 1.3% in the past year, before seasonal adjustment, a notable decline from the 1.7% figure from the 12 months ending in October.

The index for all items less food and energy rose 0.1% in November following a 0.2% increase in October, and has risen 1.7% over the last 12 months, compared to 1.8% for the 12 months ending in October

The energy index declined 3.8% in November, the fifth monthly decline in a row, and 4.8% over the past 12 months. The gasoline index fell 6.6%, the sharpest decline since December 2008 and was the main cause of the decrease in the seasonally adjusted all items index. The indexes for fuel oil and natural gas declined 3.5% and 1.7%, respectively.

The index for food prices increased 0.2% on a seasonally adjusted basis, and increased 3.2% in the past year before seasonal adjustment. The index for food at home rose 0.1% in November and has risen 3.4% over the past year. The index for food away from home increased 0.4% in November, its largest increase since January 2012, and has risen 2.9% over the past year.

Electricity was the only major component index to rise in November; it increased 0.1% and has risen 2.8% over the past year.

Read the Bureau of Labor Statistics report.

Keating on CNBC: ‘Grin and Grimace’ over Oil Prices

ABA President and CEO Frank Keating yesterday discussed the two sides to this year’s major decline in oil prices on CNBC’s “Street Signs” program, describing it as “grin and grimace.” “Consumers are grinning; we can buy more, we can save more,” he said. “It was American genius that made this happen, but it has its downside.”

That downside comes from the effects of declining prices on job growth and state revenues in the oil patch — a much bigger area thanks to newer technologies such as fracking and horizontal drilling. Thirty-five states are producers of oil and gas, Keating explained. “The residuals and ancillaries are very significant. The decline is worrisome but not calamitous — yet.”

Watch the interview.

ABA Report: Credit Card Use Rebounds in Second Quarter

Second-quarter credit card spending rebounded after a decline in the first three months of the year, according to the latest edition of ABA’s Credit Card Market Monitor released today. Subprime card spending jumped 14.3%, while prime account spending rose 10.3% and super-prime account purchases increased 8.2%. The share of borrowers who pay off their balances each month rose by 0.6 points to 29% of all accounts.

“Strong economic growth in the second quarter offset declines in the first quarter,” said ABA SVP Molly Wilkinson. “The significant economic growth we’ve seen in recent months makes it likely that credit card market trends will continue for the remainder of 2014 and beyond.”

New account volume rose 10% year-on-year, driven mostly by growth in subprime and prime accounts. The average credit line for new accounts rose slightly for subprime and prime accounts but increased 1.2% for super-prime accounts, reflecting lenders’ higher “confidence in consumers’ ability to manageable their household debt,” Wilkinson explained.

Read the Monitor.

Monday, December 15, 2014

Homebuilder Confidence Dips in December

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) fell one point to a level of 57 in December, after rising 4 points the previous month.

The HMI is made of three components, two of which experienced losses this month. The index for current sales decreased one point to 61 and the index measuring expectations for future sales dropped one point to 65. The index gauging traffic of prospective buyers remained at 45.

Of the four regions, two experienced declines in the three-month average. The Midwest recorded a three-point loss to 54 and the South dropped two points to 60. On the other hand, the West increased by four points to 62 and the Northeast edged up one point to 45.

“Members in many markets across the country have seen their businesses improve over the course of the year, and we expect builders to remain confident in 2015,” said NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Del.

Read the NAHB release.

Industrial Production Rebounded in November

Industrial Production increased 1.3% in November, after slightly increasing in October. At 106.7 percent of its 2007 average, total industrial production was 5.2% above its level of a year earlier.

Manufacturing output rose 1.1%, and the rates of change for the previous months were revised upward. The capacity rate for manufacturing moved up 0.8 percentage points. Factory output is now estimated to have been above its late-2007 pre-recession peak in both October and November.

Utilities production increased 5.1%, after decreasing 0.7% in October, and the utilization rate increased 3.9 percentage points.

Mining, the only industry group to decline in November, fell 0.1%, and the utilization rate for mines fell 0.8 percentage points.

All indexes for the major market groups increased in November. The 2.5% gain in consumer goods was its largest since August 1998. The output of business equipment and business supplies each rose 1.2%. The production of materials advanced 0.8%.

The capacity utilization rate for the total industry increased 0.8 percentage point in November to 80.1%, a rate equal to its long-run (1972-2013) average.

Read the Federal Reserve release.

Fed’s LMCI Dips to 2.9%

The Federal Reserve’s Labor Market Conditions Index (LMCI) was 2.9 in November, following a reading of 3.9 in October and 4.5 in September. The LMCI generally declines during recessions and typically rises during expansions.

The LMCI is a Federal Reserve staff research product developed to summarize overall labor market conditions. It is the primary source of common variation among 19 labor market indicators, placing greater weight on indicators whose movements are highly correlated with each other—like the unemployment rate and payroll employment—and primarily reflects those indicators that are in broad agreement.

The included indicators cover categories such as unemployment, underemployment, employment, workweeks, wages, vacancies, hiring, layoffs, quits and surveys of consumers and businesses. All indicators are measured at a monthly frequency and are seasonally adjusted.

A few indicators account for the bulk of the improvement in the LMCI since the end of the recession, as is typical in a recovery. In the first two years of the recovery, the insured unemployment rate made a large contribution to the improvement in the LMCI, reflecting a substantial slowing in layoffs; this contribution has since diminished. Gains in private payroll employment and declines in the unemployment rate have been consistent contributors to the improvement, although more in some years than in others. So far in 2014, private employment and the unemployment rate have been the primary sources of improvement in the LMCI.

The Federal Reserve plans to release the updated LMCI after 10:00 a.m. on the first business day following the Bureau of Labor Statistics’ monthly Employment Situation report.

Read the LMCI FEDS Note.
Download the data set.