The FOMC meeting of Tuesday-Wednesday anchored the April 29 week. It confirmed that monetary policy is on hold for now, although it may not be as long as previously thought if the economic data continue to improve. Fed policymakers are going to have to balance the potential threat to inflation posed by tight labor markets and rising wages against present indications that price movements are running below the 2% objective and inflation expectations are down slightly.
The outcome of the FOMC meeting was universally anticipated with no change in either interest rate or balance sheet policy. The only difference was a small technical adjustment in lowering the IOER 5 basis points to 2.35%. The post-meeting statement predictably had a modest upgrade in its assessment of economic conditions and a slightly more cautious tone regarding price stability which was affirmed by Chair Jerome Powell in his subsequent press briefing. The Q&A was shorter than usual since there was less to be said. Mainly, it was a reiteration that the FOMC is data dependent in its decision-making and that decisions are not on a preset course. As there was no official update to the Summary of Economic Projections (SEP). That will have to wait for the next FOMC meeting on June 18-19. However, I think that if the economic data continue along present lines, Powell and company’s collective forecasts may retrace some of the less positive tone of the prior version released on March 20.
In any case, having policy on hold for the next few months will benefit the Fed’s communications effort about reviewing and evaluating the monetary policy framework. At the end of the communications blackout period, policymakers got to air their respective outlooks for monetary policy as well as preview some of their thinking in advance of the Board of Governors’ June 4-5 Conference on Monetary Policy Strategy, Tools, and Communication Practices to which the Chicago Fed will play host. Policymakers have indicated that now is a good time to publicly debate how best to communicate and guide monetary policy.
Although still low and accommodative in the historical context, administered interest rates are now closer to normal and neutral, if not already there. The “abundant reserves” approach to setting rates was previously explicitly adopted as the approach to the balance sheet and controlling short term rates. Now policymakers have to determine the balance sheet’s appropriate size and maturity composition.
The floodgates for comments opened on Friday with two major policy conferences. These were Strategies for Monetary Policy: A Policy Conference at the Hoover Institute at Stanford University and the 2019 NABE International Symposium in Stockholm, Sweden. Vice Chair Richard Clarida’s speech on “Models, Markets, and Monetary Policy” captured much of policymakers’ message in regard to airing of views both on the policy outlook and on what the Fed might do in the future to ensure that markets comprehend how monetary policy is being framed. These are technical and at times complicated, and it needs to be understood in order to be nondisruptive and effective.
As a footnote to issues related to Fed policymakers, the pre-nomination of Stephen Moore to the Board of Governors went the same way as that of Herman Cain. While Moore arguably – if weakly – had better credentials than Cain, these were insufficient to paper over an ugly history of sexist and misogynistic comments and less-than-stellar financial decisions. It is back to the drawing board to find a candidate or two for the Board of Governors that would satisfy President Trump’s evident desire for like-minded loyalists, and one or two who could actually survive the scrutiny of the Senate and court of public opinion. It is a conundrum that may be unsolvable unless the White House resets its expectations to someone more mainstream and willing to maintain the independence of the central bank.
The barrage of economic data during the week indicated that the economy was doing better at the end of the first quarter and there was some upward momentum heading into the second.
First and foremost, the labor market remained quite stretched though April. Measures of resource slack like the U3 and U6 unemployment rates – 3.6% and 7.3% in April, respectively – in the household survey of the Bureau of Labor Statistics Employment Situation report point to a continued and substantive undershoot of the FOMC’s longer-run expectation of 4.4%. Indeed, the headline unemployment rate was a near 50-year low and the more inclusive U6 rate has not been this low since early 2001. Complementing this is the insured rate of unemployment from the Labor Department’s report on initial jobless that has remained just above record lows at 1.2% for a year now. Some FOMC participants have argued that there was slack remaining in the labor market, but it is probably now depleted.
The Challenger numbers on planned layoffs for April showed that recent big one-time announcements were in the rear view. While the retail sector is still contracting, the worst is past and it no longer has the largest share of intended job cuts. Restructuring – which may include some shifts to automation – is leading the industrial and services sectors to realign the size of their workforces. Nonetheless, the report suggested that layoff activity is in response to changing conditions over the course of the expansion, not of any broad trend down.
These kinds of readings show that workers who are losing their jobs are finding new ones relatively quickly, and that people on the margins of the labor market are finding themselves more hirable. The labor market is also well able to absorb new workers.
On the establishment survey side of the Employment Situation for April, payroll gains were solid for both private and government workers. The ADP National Employment Report for April had signaled an impressive 275,000 increase in private payrolls. The BLS data was more modest, but still robust 236,000. Government payrolls included the first new hires for the 2020 Census and were up 27,000. Nonfarm payrolls were up a total 263,000, above market expectations.
Also in the establishment survey, average hourly earnings were up 0.2% in April from March, but maintained a fairly steady and respectable up 3.2% year-over-year.
The Employment Cost Index (ECI) for the first quarter was consistent with solid gains in wages and salaries, and steady gains in benefits. The month-to-month and year-over-year comparison (up 0.7% and up 2.8%, respectively) pointed to ongoing improvement for workers that has lasted for the past two years. The data on personal income for March was also on a continued trend of modest monthly increases. Personal consumption expenditures were also higher in March.
Increases in earnings have yet to menace overall price stability. The March PCE deflator was up 1.5% compared to a year-ago, and the core PCE deflator was up 1.6%. The core measure was something of a surprise. Chair Powell noted this but also blamed temporary, idiosyncratic factors for the low reading which should fade in the near future. Nonetheless, it gives a data-dependent FOMC room to wait on further removal of accommodation while the unemployment rate extends its undershoot of the longer-run forecast.
The Conference Board’s Consumer Confidence Index for April followed its normal pattern of firming after a softer month and rose to 129.2 from 124.2 in March. If the readings are off the peaks of last year, consumers remain quite optimistic with the robust labor market and rising earnings, both in the present and six months from now.
Both of the ISM surveys for manufacturing and non-manufacturing came in Manufacturing Index for April was below expectations came in below expectations. The ISM Manufacturing Index slipped to 52.8 in April from 55.3 in March on slower new orders, production, and employment. The ISM Non-Manufacturing Index declined to 55.5 in April from 56.1 in March. While business activity firmed and new orders were not much changed, employment and supplier delivery times were lower. Recent months’ readings for both indexes have been uneven while the general trend appears to be for middling expansion.
New orders for factory goods in March were up 1.9% from the prior month, boosted by a 1.1% increase in nondurables on top of the 2.6% rise for durables. On the nondurables side it was mostly due to higher petroleum and coal costs. Durables got a lift from transportation of up 7.0% which was concentrated in aircraft. Excluding transportation, durables orders were up a modest 0.3%. “Core” durables – durable orders minus civilian aircraft and defense capital goods – was up 0.7% in March from February and a second month of upward movement.
While the 3.8% gain in the NAR’s Pending Home Sales Index for March is unlikely to be sustained into April, it does represent a burst of activity for the housing market that started the spring buying season off with a positive flourish. The increase was a nice upside surprise that can be largely attributed to the dip in mortgage interest rates that made purchasing a home more attractive and more affordable in the present market.
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