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Look back at April 8, 2019 week: Fed minutes leave future rate hikes on the table, economic data is generally positive

A look back at the April 8 week saw the economic data much as expected. However, there were a few surprises.

Beyond the data, the minutes of the March 19-20 FOMC meeting presented some mixed signals. Taken in the context of three weeks ago when the deliberations occurred and the incomplete and less positive available economic data, the FOMC was not united on the medium-term outlook for rates.

The minutes said, “Participants continued to emphasize that their decisions about the appropriate target range for the federal funds rate at coming meetings would depend on their ongoing assessments of the economic outlook, as informed by a wide range of data, as well as on how the risks to the outlook evolved. Several participants noted that their views of the appropriate target range for the federal funds rate could shift in either direction based on incoming data and other developments. Some participants indicated that if the economy evolved as they currently expected, with economic growth above its longer-run trend rate, they would likely judge it appropriate to raise the target range for the federal funds rate modestly later this year.” [emphasis added]

I think that there were two messages here. First, the “several” participants wanted to emphasize that the FOMC would be responsive to changes in the economy, both to the up- and downside. Second, the “some” participants wanted to signal that they considered the softer economic data as a blip related to some short-term risks and adjustments that would give way to continued moderate growth. However, there is unanimity among policymakers that it was and will be the data that will determine the next steps in monetary policy. They may not interpret it in exactly the same way, and thus the “patient” approach to put the risks in proper perspective against what the data reports say relative to fulfilling the dual mandate.

On the side of maximum employment, the report on initial jobless claims for the week ended April 6 would argument that layoffs are few and at historic lows, and the insured rate of unemployment is consistent with a very tight labor market. The level surprised and broke below the psychologically important 200,000-mark and was lowest in nearly 50 years. The insured rate of unemployment hasn’t budged from 1.2% in nearly a year.

Data on Job Openings and Labor Turnover (JOLTS) for February reflected the numbers in the employment report with slower hiring and fewer job openings, but levels and rates are not far off the series’ records. Separations remain low and the number of voluntary job leavers are consistent with optimism about the job market.

As expected, the data on inflation saw the impact of increases in energy prices for March in the headlines. However, at the core, inflation appears to remain tame and in line with the Fed’s 2% objective. The CPI was up 0.4% month-over-month and up 1.9% year-over-year; the core was up 0.1% and up 2.0%. Final Demand PPI rose 0.6% in March from February and was up 2.2% compared to a year ago; the core – excluding food, energy, and trade services – was flat month-over-month and up 2.0% from a year-ago. The Import Price Index for March rose 0.6% and was up 0.2% excluding petroleum, with year-over-year prices flat overall and down 0.3% excluding petroleum. There is little sign that import prices are going to start pushing inflation higher.

The Atlanta Fed’s Business Inflation Expectations were at 1.9% in April, unchanged from the prior two months. The University of Michigan consumer inflation expectations were at 2.4% and 2.3% for 1-year and 5-years, respectively. These are modest expectations and show that inflation is expected to chug along near the Fed’s 2% objective over the medium term.

Stable inflation and stable inflation expectations will give the FOMC room to wait before considering further rate hikes in the face of a strong labor market. That could change if there is any sign that wage increases are starting to leak into overall inflation.

Business confidence seemed little changed in March with the NFIB Small Business Optimism Index reading at 101.8, a scant increase from 101.7 in February and 101.2 in January. The declines from the peaks in 2018 do not represent a significant downgrade in business confidence. Rather, it suggests a return to sustainable level of optimism under present conditions.

The preliminary University of Michigan Consumer Sentiment Index indicated that confidence as lower in early April. However, the 96.9 reading wasn’t significantly lower than the 98.4 in March. The component for current conditions was higher at 114.2 from 113.3, while six-month expectations were lower at 85.8 from 88.8. These are good levels for the index in the historical context. While some of the gloss from the stimulus that marked 2018 has faded, growth is expected to continue and support the labor market and rising wages.

New orders for all factory goods were down 0.5% in February. Nondurables were up 0.6% due to higher energy prices, but durables were down 1.6% on weakness in transportation. However, Boeing reported a rise of 39 aircraft orders to a total of 44 for the month. This should help support the transportation component when advance orders for durable goods in March are reported on Thursday, April 25 at 8:30.



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