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 easing inflationary pressures.
Reports showed the housing market is struggling, wage increases are slowing, consumers are growing somber and manufacturing is faltering in one region of the country. Taken together, Wednesday’s data points to “sluggish growth, easing wage pressures and a still-soaked but not collapsing real estate market,” said Robert Kavcic, senior economist at BMO Capital Markets, in a comment.
In addition to reports on the state of the US economy, the International Monetary Fund showed an improved outlook for global inflation.
But those factors weren’t enough to change most Federal Reserve observers’ expectations for a 25-point rate hike on Wednesday. The mounting signs of an economic slowdown could have a greater impact on the future course of Fed policy, although experts disagree on how much and how quickly Fed officials will be affected.
Slower wage growth in particular could prompt the central bank to backtrack on rate hikes sooner rather than later, Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a comment.
“The message is clear now: the Fed should stop tightening,” he said. “We’re increasing the probability of a no-raise in March from 60% to 70%.”
That would be a departure from what the Fed has signaled. At the December meeting, members of the Federal Open Market Committee forecast that rate hikes would only stall after two more 25-point hikes after February, which would put the rate in the 5% to 5.25% range.
The Fed is likely to stick with plans to raise rates further at its next few meetings despite weakening economic indicators, Vanguard Group global chief economist Joe Davis said in a comment.
“The Fed is struggling with market, fiscal and business expectations, and if they underperform their stated terminal rate, it could hurt its credibility and ability to respond effectively if inflationary pressures resurface,” he wrote.
S&P CoreLogic Case-Shiller House Price Index
The gauge of nationwide home prices fell for a fifth month in November. The index’s 0.3% decline underscores the toll that the Fed’s rate hikes and the resulting rise in mortgage rates have taken on the housing market. The year-on-year price increase fell to 7.7% from 9.2%. Since peaking in mid-2022, prices are now down 3.6%.
“Higher mortgage rates and housing affordability at rock bottom are crushing the US housing market,” said Matthew Walsh, an economist at Moody’s Analytics, in a comment.
Falling home prices could have a big impact on headline inflation and the Fed’s response to it later this year, James Knightley, chief international economist at ING, said in a comment.
“In an environment of recession and targeted inflation, we expect the Federal Reserve to cut interest rates aggressively beginning later this year,” he said.
labor 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 are now up 5.1% for the year — a slowdown from their peak of 5.7% in the second quarter of 2022. While rapidly rising wages are benefiting workers’ budgets, the Fed wants those increases to stall out of fears return to a “wage” -price spiral” Feedback loop between prices and wages. Fed Chair Jerome Powell has repeatedly expressed concerns that such a spiral would fuel runaway inflation.
The new wages data should reassure Powell and other policymakers that the threat of such a scenario “is no longer realistic,” pantheon economist Shepherdson said in a comment.
consumer confidence
Consumers became more pessimistic about the future outlook for their own finances and the broader economy in January, defying economists’ expectations that the outlook was improving.
That’s according to the Conference Board’s Consumer Confidence Index, which fell 1.7% and shows that people are bracing for bad economic times on the horizon. The part of the index that measures future expectations fell to levels historically associated with approaching recessions, the board said.
Consumer confidence is an important indicator as it is believed to influence people’s purchasing decisions – and consumer spending is the engine driving much of the country’s economic growth.
Despite growing fears of an impending recession, the survey showed consumers are still optimistic about the job market — a factor that will suggest the Fed stays on track on its rate-hike plans, Katherine Judge, economics director at CIBC Capital Markets, said in a Comment.
Chicago Business Barometer
The Chicago-area manufacturing activity measure, considered a leading indicator of the direction of the US economy, fell to 44.3 in January – the index remained below 50 for the fifth straight month, suggesting business is contracting. The index is based on a survey of buyers in the manufacturing industry.