U.S. job market remains strong, economic activity rising, FOMC minutes say

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The U.S. labor market remained strong and economic activity increased at a moderate rate, the Federal Open Market Committee determined at its Jan. 28-29 monetary policy meeting, according to minutes released on Wednesday.

“Job gains had been solid, on average, in recent months, and the unemployment rate had remained low. Although household spending had been rising at a moderate pace, business fixed investment and exports remained weak,” the FOMC minutes said. “On a 12-month basis, overall inflation and inflation for items other than food and energy were running below 2%. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed.”

At its meeting last month, the FOMC kept the fed fund target rate in a range of 1.50% to 1.75%. It raised the interest rate on excess reserves to 1.60% from 1.55%, a technical move to keep the funds rate in the specified range.
FOMC members felt the current stance of monetary policy was appropriate “to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2% objective.”

Members also agreed, "in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee would assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2% inflation objective.”

The FOMC said data warranted a slight downgrade in the statement’s description of recent rises in household spending from “strong” to “moderate.” It also agreed to describe the current monetary policy stance as consistent with inflation “returning to,” rather than being “near,” its 2% longer-run objective.

“Currently, the Fed’s commentary suggests a policy bias that can be described as ‘neutral-to-dovish,’ but it is giving no indication that additional rate cuts are likely in 2020 after the 75 basis points of cuts last year,” said Robert Robis, chief global fixed income strategist at BCA Research.

The FOMC won’t cut rates further without first seeing the U.S. Treasury curve becoming inverted for a prolonged period, he said.

“While FOMC members have expressed concern about TIPs breakevens being persistently below the 2% inflation target, they would not necessarily respond to a further decline in breakevens with more rate cuts without first seeing the U.S. Treasury curve becoming inverted for a prolonged period, just like in 2019,” he said.

N.Y. Fed business survey
Regionally, the Federal Reserve Bank of New York said activity in the district’s service sector grew at a faster pace than in recent months.

According to firms responding to the Federal Reserve Bank of New York’s Business Leaders Survey for February, the business activity index climbed six points to 9.8, its highest level in several months.

However, the business climate index fell to slightly below zero, indicating that, on balance, firms regarded the business climate as worse than normal, the New York Fed said.

Firms were optimistic about future conditions and said they expected significant increases in employment in the months ahead, the N.Y. Fed said.

Housing starts
Looking at real estate, the Commerce Department reported that privately owned housing starts fell 3.6% in January to a seasonally adjusted annual rate of 1.567 million from a revised level of 1.626 million in December, originally reported at 1.608 million.

Economists surveyed by IFR Markets had expected a rate of 1.415 million in January.

However, last month's reading is 21.4% above the January 2019 rate of 1.291 million.

Building permits rose 9.2% in January to a seasonally adjusted annual rate of 1.551 million from a revised December rate of 1.420 million, originally reported as 1.416 million. The rate is 17.9% above the January 2019 rate of 1.316 million.

“The latest month’s decline in housing starts is nothing to be concerned about. This housing data is quite jumpy,” said Lawrence Yun, the National Association of Realtors’ chief economist. “What is important is the trend line, which is clearly on an upward path. Higher housing permit issuances are also a positive indicator for even greater production in the months ahead.”

Following a surge of activity in December, housing starts pulled back slightly in January, but the current pace is still over 1.5 million units — remaining close to the highest levels since 2006, said Joel Kan, associate vice president of the Mortgage Bankers Association.

“The housing market is still experiencing supply shortages in many areas, but January’s residential construction data show yet another step in the right direction,” Kan said.

Producer prices
The producer price index for final demand rose a seasonally adjusted 0.5% in January, the Labor Department reported.

Economists polled by IFR Markets had expected PPI to rise by 0.1%.

Final demand prices rose 0.2% in December and declined 0.1% in November. On an unadjusted basis, the final demand index increased 2.1% for the 12 months ended in January, the largest advance since moving up 2.1% for the 12 months ended May 2019.

In January, 90% of the increase in the final demand index is attributable to prices for final demand services, which climbed 0.7%. The index for final demand goods inched up 0.1%.

Prices for final demand less foods, energy, and trade services advanced 0.4% in January, the largest increase since a 0.4% rise in April 2019. For the 12 months ended in January, the index for final demand less foods, energy, and trade services moved up 1.5%.

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