Solid Economic Data Supports Another Step in the Fed’s Pivot
- The Leading Economic Index for November gained 0.6 percent.
- The Consumer Price Index for November fell by 0.3 percent with lower gasoline prices.
- Initial Claims for Unemployment Insurance fell by 6,000 for the week ending December 13 to 289,000.
- FOMC keeps near-zero rates, tweaks forward guidance.
Even with higher financial market volatility and an increasing sense of uncertainty about the global economy and geopolitics, U.S. economic data continues to show momentum at year-end that will carry through to early 2015. According to yesterday’s FOMC monetary policy statement, U.S. economic activity is expanding at a moderate pace. Consistent with that analysis, the Conference Board’s Leading Economic Index increased by 0.6 percent in November. Eight out of 10 components of the LEI increased for the month. Of the two decreasing components, initial claims for unemployment insurance have since resumed their declining trend, and residential building permits are expected to rise through 2015. The Coincident Index and the Lagging Index were also up for the month.
Overall consumer prices eased in November as crude oil prices slid and gasoline followed suit. The consumer price index fell by 0.3 percent last month as the energy sub-index eased by 3.8 percent. According to AAA, the national average price for regular unleaded is now down to $2.48 per gallon. Many service stations in Texas are already below $2.00 per gallon. Food prices gained a moderate 0.2 percent in November. Core CPI (all items less food and energy) was up a modest 0.1 percent for the month, and is up 1.7 percent over the previous year. Core prices are being supported by gains in house prices and rents. Weaker year-over-year inflation may potentially complicate the Federal Reserve’s timing of interest rate lift off, but for now the Fed sees the deflationary effect of falling energy prices as a transitory phenomenon. They are looking through currently lower energy prices and seeing the potential for stronger wage inflation in 2015 as labor markets continue to tighten.
Mid-December data says that labor markets are indeed still tightening. Initial claims for unemployment insurance fell by 6,000 for the week ending December 13, to hit 289,000. Continuing claims were down sharply, by 147,000, to hit 2,373,000 for the week ending December 6.
Yesterday’s Federal Reserve policy announcement and press conference by FOMC chairwoman Janet Yellen confirmed another step in the Fed’s pivot toward monetary policy normalization. As expected, the FOMC kept the fed funds rate near-zero. Also, the FOMC amended its forward guidance on interest rates, but in doing so they retained the “considerable time” phrase. In her post-FOMC announcement press conference, Yellen made four important statements regarding interest rate lift-off. (1) Almost all FOMC participants believe that it will be appropriate to see interest rate lift-off in 2015. (2) The FOMC is unlikely to begin interest rate normalization for at least the next couple of meetings. (3) The three prerequisites for interest rate lift-off are core inflation near current levels, inflation expectations remain anchored and improvement in labor market metrics. (4) Yellen stressed that when interest rate lift-off does occur there should not be an expectation of a measured pace of rate increases, namely, 25 basis points per meeting. There will be no “measured pace”. She stressed that the trajectory of the fed funds rate will be data dependent. We continue to expect interest rate lift-off near mid-year 2015.
Market Reaction: Equity markets like the economic data and they like the Fedspeak. Equity prices are up sharply in early trading. The 10-Year Treasury bond yield is up to 2.21 percent. NYMEX crude oil is showing some stability, up to $56.11/barrel. Natural gas futures are down to $3.64/mmBTU.
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