Federal Reserve Raised Short-Term Rates Again, Signals Two More Hikes in 2017

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As expected, the Federal Open Market Committee (FOMC) voted to raise short-term interest rates by 25 basis points, upping them just three months after the last action. In doing so, the Federal Reserve noted better economic data and increased pricing pressures. Specifically, the statement cited a strengthening labor market, moderate growth in consumer spending and business investment that has “firmed somewhat.” While inflation is picking up, the FOMC predicts that prices “will stabilize around 2 percent over the medium term.” Nonetheless, it wants to stay ahead of such pressures while inflation is still at acceptable ranges. Hence, the Federal Reserve will continue its process toward normalized rates, and according to the latest economic projections, participants still see three rate hikes—or two more after this one—in 2017. Assuming those increases in the federal funds rate were also 25 basis points, the target range would be at 1.25 percent to 1.50 percent by year’s end (up from 0.75 percent to 1.00 percent after this action).

Of course, future Federal Reserve moves will hinge on incoming data, and more aggressive action might be necessary if the U.S. economy and/or inflation accelerate beyond current expectations. Along those lines, the economic forecasts did not change much from December. Participants see 2.1 percent growth on average in real GDP in 2017, with the unemployment rate falling to 4.5 percent. They also predict core inflation of 1.9 percent. Looking to 2018, FOMC members anticipate thee additional federal funds rate hikes, with real GDP growth of 2.1 percent once again. They forecast core inflation to be 2 percent.

Neel Kashkari, president of the Minneapolis Federal Reserve Bank, was the only dissenter. He preferred to keep short-term interest rates unchanged, at least for now.

For the First Time in 2016, the Federal Reserve Raised Short-Term Rates; Three Increases Seen in 2017

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The Federal Open Market Committee (FOMC) opted to raise short-term rates for the first time so far in 2016 at the conclusion of its December 13–14 meeting. The target of the federal funds rate was increased by 25 basis points, with the range now between 0.50 to 0.75 percent. This move was widely expected, with financial markets having already pricing in this move. Moving into 2017, FOMC participants appear to be more hawkish than they were three months ago, with economic projections appearing to forecast three rate hikes next year. That is up from a median prediction of two rate hikes at their September meeting. Beyond next year, Federal Reserve participants also see three increases in both 2018 and 2019.

To be fair, the Federal Reserve is playing catch-up a little here, with the bond market already sending yields significantly higher since the election. Indeed, yields on 10-year Treasury bonds have already risen more than 60 basis points since early November. Read More

Higher Food Costs Helped to Push Producer Prices Higher in November

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Producer prices increased 0.4 percent in November, bouncing back from being unchanged in October at growing at its fastest monthly pace since June. Digging into the data, producer prices for final demand goods rose for the third straight month, up 0.2 percent in November. A large jump in food costs, up 0.6 percent, helped to explain much of this boost, with energy prices edging down 0.3 percent. Still, food costs have been on a downward trend over the longer-term, down 2.6 percent over the past 12 months. On the other hand, energy prices have were virtually flat year-over-year, up just 0.2 percent. Excluding food and energy, final demand goods prices for producers increased by 0.2 percent in November. Read More

Producer Prices Were Unchanged in October, but Were Up 0.4 Percent for Final Demand Goods

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Producer prices were unchanged in October, slowing after a rebound in the September data. The flat growth in the headline number stemmed from reduced producer prices for final demand services, down 0.3 percent. In contrast, producer prices for final demand goods increased 0.4 percent in October, extending the 0.7 percent gain seen in September. Higher inflation for goods came largely from a jump in energy costs, up 2.5 percent; whereas, food prices were off by 0.8 percent. Food costs have been on a downward trend over the longer-term, down 3.5 percent over the past 12 months. On the other hand, energy prices have edged up 0.2 percent year-over-year. Read More

Producer Prices Ticked Higher in September, but with Inflation Largely Still in Check for Now

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Producer prices ticked higher in September, bouncing back from softness in the prior two months. The Bureau of Labor Statistics said that producer prices for final demand goods and services rose 0.3 percent in September, the first increase reading in three months. For final demand goods, food and energy prices were both higher, up 0.5 percent and 2.5 percent, respectively, but each were coming back from notable declines in both July and August. The longer-term trend has been negative for both. Food costs have decreased 3.4 percent over the past 12 months, with energy prices off by 2.4 percent year-over-year. Read More

Manufacturing Production Data for August Were Disappointing

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According to the Federal Reserve, manufacturing production fell by 0.4 percent in August. After two straight months of gains, this news was disappointing, even as it mirrored weaknesses found in other economic indicators in August. Moreover, manufacturing production has declined over the past 12 months, the first year-over-year decline since December. In addition, manufacturing capacity utilization decreased from 75.2 percent to 74.8 percent, a three-month low. As such, this report highlights the tremendous challenges in the sector. Nonetheless, manufacturers continue to be cautiously hopeful for increased activity over the coming months, as noted in our latest survey.

The current softness, though, means that policymakers need to focus more on priorities that will grow the economy and increase competitiveness. It also suggests that the Federal Reserve is likely to wait to raise rates. Along those lines, 45.5 percent of respondents to our survey felt that the Federal Open Market Committee would hike rates in December.

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Manufacturing Employment Declined Again in August

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In another sign that manufacturing in the United States remains weaker-than-desired despite some signs of recent progress, employment in the sector fell once again in August. Manufacturers hired 14,000 fewer workers on net in August, and the job gains for the prior two months were revised down by a combined 10,000. All in all, manufacturing employment has fallen by 39,000 year-to-date through August, suggesting continuing cautiousness among manufacturing business leaders to add workers in light of lingering weaknesses in the global economy. It is hard not to be disappointed by these numbers, particularly when combined with yesterday’s ISM data, which found that overall manufacturing activity contracted for the first time since February.

Durable goods firms shed 16,000 workers in August, with nondurable goods manufacturers adding 2,000 jobs for the month. Of the 19 major sectors in manufacturing, all but four had reduced employment in August. The largest declines were seen in the transportation equipment (down 6,400, including a 5,600 decline for motor vehicles and parts), primary metals (down 2,500) and nonmetallic mineral products (down 1,400). In contrast, there were employment gains in August for food manufacturing (up 4,500), paper and paper products (up 700), machinery (up 500) and petroleum and coal products (up 400). Read More

Federal Reserve Left Rates Unchanged in June, as Expected

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As expected, the Federal Open Market Committee (FOMC) did not change short-term interest rates at its June 14–15 meeting. Prior to the release of disappointing employment numbers for May, the Federal Reserve had positioned itself to begin hiking rates at its June meeting, with two increases anticipated in 2016. (At least one participant predicted just one increase in the federal funds rate this year, according to the latest economic projections.) The jobs report shifted those expectations to either the July 26–27 or the September 20–21 FOMC meetings. My own forecast would be for the hike to come in July, subject to incoming data between now and then. Along those lines, the press release has the following to say about the timing of future moves:

The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

In terms of the economy, FOMC participants said that “the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.” On this latter point, they noted the declining unemployment rate and better retail spending data. With that said, the Federal Reserve officials see real GDP growing 2.0 percent in 2016, down from an outlook of 2.2 percent in March, and the unemployment rate was seen falling to 4.7 percent, which happens to be the current rate. In terms of inflation, the Fed predicts core price increases of 1.7 percent this year.

Producer Prices for Final Goods and Services Picked Up in May

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The Bureau of Labor Statistics said that producer prices for final demand goods and services rose 0.4 percent, extending the 0.2 percent gain seen in April. At the same time, the producer prices for final demand goods jumped 0.7 percent in May, its fastest pace in 12 months. Energy costs rose 2.8 percent in May on higher crude oil prices, which approached $50 per barrel for West Texas Intermediate crude by month’s end, levels not seen since July 2015. At the same time, food costs were up 0.3 percent, offsetting the 0.3 percent decline observed in the prior report. The rise in food prices in May for goods producers came largely from higher costs for chicken, eggs, fresh and dry vegetables, grains, oilseeds and pork. Despite the rises this month, food costs have trended lower over the past 12 months, down 2.7 percent, with energy prices off 14.2 percent year-over-year. Read More

The U.S. Economy Had Sluggish Start to 2016

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The Bureau of Economic Analysis said that the U.S. economy grew just 0.5 percent in the first quarter of 2016, signifying a sluggish start to the year. This was slightly below the consensus estimate of real GDP growth of 0.7 percent, and it was down from 1.4 percent growth in the fourth quarter of 2015. In many ways, the data for the first quarter mirrored the trends seen in the prior report, with drags on growth coming from fixed business investment and net exports. Consumer spending on goods was the difference-maker in this release.  While personal consumption continued to be one of the brighter spots, adding 1.27 percentage points to headline GDP growth, that increase stemmed almost entirely from spending on services. The gain from goods spending was negligible – adding just 0.03 percentage points. This finding is consistent with the disappointing retail sales numbers observed year-to-date, particularly for durable goods, and it was another sign that Americans have pulled back on their purchases as a result of anxieties in the economic outlook. Read More