Comerica Economic Weekly

Expectations for a fed funds rate hike at the upcoming May 2-3 Federal Open Market Committee meeting remain muted. According to the fed funds futures market, the implied probability of a 25 basis point rate hike on May 3 is just 6 percent. The FOMC ‘s June 13-14 meeting is in play for a rate hike, with the implied probability up to about 62 percent.

The Fed’s recent March 15 “dot plot” is consistent with two more 25 basis point rate hikes this year, for a total of three by year end. If we do have a June 14 rate hike, that will reinforce the cadence of one rate hike every other FOMC meeting, occurring on FOMC meetings that have a scheduled news conference. This cadence was established with the December 14, 2016 fed funds rate hike, followed by the March 15, 2017 rate hike.

This cadence is not set, but it shows that the Fed has some communication to do in order to establish expectations for the second half of the year since the cadence must change if they stick with only three rate hikes this year. Various Fed officials, including Chairwoman Janet Yellen, Vice-Chairman Stanley Fischer, and regional Fed presidents Williams, Evans, Rosengren, Dudley and Bullard all made comments this week. Their comments collectively suggest that there is an active debate within the Fed about what to do in the second half of 2017.

Inflation and inflation expectations figure large in that debate. The February income and spending data shows that a closely watched gauge of inflation, the personal consumption expenditure price index, increased by 0.1 percent in February after a large 0.4 percent gain in January. The core PCE price index (excluding food and energy) gained 0.2 percent in February. Over the previous 12 months the headline PCE price index was up by 2.1 percent and the core PCE price index was up by 1.8 percent. So it is fair to say that inflation indicators are closing in on the Fed’s near-2-percent target.

The recent swing in energy prices will factor into inflation indicators through the summer. WTI crude oil dipped below $48 per barrel last week, hitting a daily average low of $47.70 on March 23. Since then we have seen a rally in oil prices back up to just over $50 per barrel. Higher oil prices would add to the pressure on broad inflation indicators, possibly tilting the Fed toward a total of 4 rate hikes this year. Weaker oil prices suggest the opposite, favoring just three rate hikes this year.

Also in the income and spending data for February we see that nominal income was up by 0.4 percent for the month, while inflation-adjusted after-tax income gained a moderate 0.2 percent. Consumers held on to their gains as inflation-adjusted spending fell by 0.1 percent in February, giving the personal saving rate its second straight monthly increase, hitting 5.6 percent. Consumer spending was weighed down by stable auto sales and by warm winter weather which held down spending on utilities.

Other economic data from this week was generally favorable. House prices remain strong (see graph next page). Unemployment insurance claims remain very low through March 25. Consumer confidence spiked in March according to the Conference Board which could factor into stronger than expected auto sales for the month.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here:  Comerica_Economic_Weekly_ 03312017.


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