The Federal Open Market Committee got a final look at the economy ahead of Wednesday’s policy announcement, and the picture was of slowing growth and decelerating inflationary pressures.
Reports show that the housing market is struggling, wage increases are slowing, consumers are growing gloomier and manufacturing is falling in one region of the country. Taken together, Wednesday’s data points to “sluggish growth, cooling wage pressures and a still soggy but not collapsing housing market,” Robert Kavcic, senior economist at BMO Capital Markets, said in a comment.
In addition to the reports on the state of the US economy, the International Monetary Fund showed an improved outlook for global inflation.
However, these factors were not enough to change the expectations of most Federal Reserve observers for a 25-point rate increase on Wednesday. The mounting evidence of an economic slowdown could have a greater impact on the future path of Fed policy, although experts disagree on how much and how quickly Fed officials will be changed.
Slower wage growth, in particular, could encourage the central bank to scale back interest rate hikes sooner rather than later, Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a comment.
“The message now is clear: The Fed should not hold back,” he said. “We increase the chance of no hike in March to 70% from 60%.”
That would be a departure from what the Fed has signaled it will do. At the December meeting, members of the Federal Open Market Committee predicted that interest rate hikes would stop only after two more 25-point hikes after February, which would bring the rate to the 5%-5.25% range.
The Fed is likely to stick to its plans to continue raising rates at its next meetings despite the weak economic indicators, Joe Davis, Vanguard Group’s global chief economist, said in a comment.
“The Fed is fighting against market, household and business expectations and if they come up short of their stated terminal rate, it could negatively impact their credibility and ability to respond effectively when inflationary pressures re-emerge,” he wrote.
S&P CoreLogic Case-Shiller Home Price Index
The measure of national housing prices fell for a fifth month in November. The 0.3% decline in the index highlights the toll the Fed’s interest rate hikes and the consequent spike in mortgage rates have taken on the housing market. Year-over-year price growth fell to 7.7% from 9.2%. Prices have now fallen 3.6% since peaking in mid-2022.
“High mortgage rates and rock-bottom housing affordability are destroying the US housing market,” Matthew Walsh, an economist at Moody’s Analytics, said in a commentary.
Falling house prices could have a big impact on headline inflation and the Fed’s response later this year, James Knightley, chief international economist at ING, said in a comment.
“In an environment of recession and target inflation, we expect the Federal Reserve to cut interest rates aggressively from later this year,” he said.
Employment Cost Index
Labor costs for private employers, including wages and benefits, rose 1% in the fourth quarter of 2022, the Bureau of Labor Statistics reported. That was the slowest pace since early 2021, and less than economists expected.
Wages and salaries are now up 5.1% over the year – an extension of their peak of 5.7% in the second quarter of 2022. While rapid increases in wages benefit workers’ budgets, the Fed wants to see these increases out of fear before a “wage -price spiral” feedback loop between prices and salaries. Fed Chairman Jerome Powell has expressed concern on several occasions that a spiral like that would cause inflation to spiral out of control.
The new wage data should reassure Powell and other policymakers that the threat of such a scenario “is no longer realistic,” Shepherdson, the Pantheon economist, said in a comment.
Consumers grew more pessimistic about the future outlook for their own finances and the broader economy in January, defying economists’ expectations that the outlook would improve.
That’s according to the Conference Board’s Consumer Confidence Index, which ticked down 1.7%, indicating that people are bracing for bad economic times on the horizon. The portion of the index that measures future expectations fell to a level historically associated with approaching recessions, the board said.
Consumer confidence is an important indicator because it is thought to influence people’s decisions about spending – and consumer spending is the engine that drives much of the country’s economic growth.
Despite fears of an impending recession, the survey showed that consumers still have a rosy assessment of the labor market — a factor that will work in the Fed’s favor to stay the course on its rate hike plans, Katherine Judge, director of the Economy at CIBC Capital Markets, said in a comment.
Chicago Business Barometer
A measure of manufacturing activity in the Chicago area, seen as a leading indicator of the direction of the US economy, fell to 44.3 in January – the fifth straight month the index has remained below 50, signaling that business is shrinking. The index is based on a survey of purchasing professionals in the manufacturing industry.