Fed Puts Rate Increases in Play The Federal Reserve opened a door to raising short-term rates by midyear but offered several reasons it is still in no great rush to act. It said it would move when it is reasonably confident low inflation is on track to return to its 2% target.
The Fed, in a statement Wednesday after its two-day meeting, dropped an assurance that it would remain “patient” before acting on rates. In the odd parlance of central bankers, the shift meant the Fed would consider raising short-term rates at its June 16-17 meeting.
Yet comments by Fed Chairwoman Janet Yellen after the meeting and new central bank forecasts suggested the Fed intends to proceed cautiously. It isn’t yet set on raising rates in June, and once it starts it now sees a smaller succession of increases in coming years than it did just three months ago. That is in part due to low inflation.
“Just because we removed the word patient from the statement doesn’t mean we are going to be impatient,” Ms. Yellen said in a postmeeting press conference. (…)
Asked at the press conference what would make her and Fed officials confident inflation will rise toward the target, Ms. Yellen said, “I don’t have a mechanical answer for you.” adding officials will be looking at “a wide array of data.” (…)
Officials revised down their projections of economic growth in the coming years, thanks in part to the hit to exports.
In 2015, for example, they said they expected economic output to expand by between 2.3% and 2.7%, a downgrade from their December estimate of 2.6% to 3.0%. Forecasts for 2016 and 2017 were also shaded down, part of a long-running series of growth-estimate downgrades the Fed has confronted in recent years. (…)
Fed’s 2015 Growth Outlook Eroding for Two and a Half Years
The Fed also shaved its estimates of inflation. In 2015 the Fed projects inflation of 0.6% to 0.8%. Officials don’t see it getting near its 2% target until 2017, a potentially important clue on the timing of rate increases. (…)
Importantly, however, the Fed also revised down its estimate of how low the jobless rate can fall before it starts creating inflationary pressure. In December, officials estimated this long-run rate was between 5.2% and 5.5%. Now they say it is 5% to 5.2%. That shift means officials believe they can wait longer before they start to raise rates. (…)
“Export growth has weakened. Probably the strong dollar is one reason for that,” Ms. Yellen said at a news conference in Washington. “On the other hand, the strength of the dollar also in part reflects the strength of the U.S. economy.”
A strong dollar also “is holding down import prices and, at least on a transitory basis, at this point pushing inflation down,” she said.
Related reading:
- Fed Cuts ‘Patient,’ but Downgrades Economic Outlook
- Parsing the Fed: How the Statement Changed
- Read the Full Text of the Fed’s March Statement
- Greg Ip: Future Threats, Not Present Danger, Counsel Caution on Raising Rates
- Economists React to the Fed’s March Statement: ‘No Longer Patient, But Definitely Not Impatient, Yet’
- Janet Yellen Says June Meeting Might Bring First Rate Rise
- Fed Officials Trim Back Estimates Of Interest Rate Rises Amid Big Forecast Changes
- The Fed Doesn’t Think the U.S. Economy Is at Full Employment, After All
- Fed Officials See Slower Inflation Pickup Than Private Economists Do
Meanwhile, in the real world:
In the latest weekly measure, Smith Travel Research (STR) today reported that U.S. industrywide hotel RevPAR grew by 3.8% last week (the week ended March 14) from year-ago levels (the prior five weeks saw RevPAR growth of 2.5%, 5.1%, 6.2%, 9.6%, and 5.5%, respectively). The calendar comparison was clean. The year-ago comp was +5.8%.
Over the last 28 days, RevPAR is up by an average of 4.5%, a pace that has been slowed by weakness in New York.
New York City hotels last week reported a 5.2% RevPAR decline (reflecting an 6.2% ADR decrease and a 1.0% increase in occupancy to 83.5%, up 580 bp sequentially); this came against an easy year-ago comp of -13.4%. During the past four weeks, RevPAR in New York City is down 2.0%. (Raymond James)
Target to Raise Minimum Wage Target plans to boost pay of all its workers to at least $9 an hour starting next month, following similar moves by rivals Wal-Mart Stores and TJX as competition for lower wage workers heats up.
Pickens says US must cut oil output Saudi’s refusal to trim production dismissed by legendary trader
The legendary trader and corporate raider said US producers must adjust to the plunge in the crude price caused by a US oil glut and predicted that shale production would stop rising in May or June. (…)
Mr Pickens, an industry maverick since the 1950s, predicted that more such cuts would help bring the crude price back up to $70 per barrel by December and said he had placed bets in the market to profit from such a rise. (…)
(…) The Canadian Association of Oilwell Drilling Contractors, which closely tracks drilling activity, said in February that up to 23,000 jobs could be lost as the number of rigs fall. Since the price started dropping last September, about 13,000 positions in the Alberta natural resources sector, mostly oil and gas, have been eliminated, according to Statistics Canada.
The bloodletting among the oil majors and their vast web of ancillary services has of course extended to the United States – which appears to be taking far more casualties than Saudi Arabia in the battle for market share. In January oilfield services giant Baker Hughes said it will lay off 7,000 employees, about 11 percent of its workforce; that number was rivalled only by its competitor, Schlumberger, which let go 9,000 workers. Shell, Apache, Pemex and Halliburton are among major oil companies to issue recent pink slips to the growing army of unemployed oil workers. In the U.S., the worst pain is, not shockingly, expected to be felt in Houston. Assuming a one-third reduction in oil company capital expenditures this year and 5 percent in 2016, the hydrocarbon capital of the world could lose 75,000 jobs, in a city that has added 100,000 new positions every year since 2011, said a professor at the University of Houston.
The oil jobs nightmare is in fact spreading like a cancer. According to Swift Worldwide Resources, “the number of energy jobs cut globally has climbed well above 100,000 as once-bustling oil hubs in Scotland, Australia and Brazil, among other countries, empty out,” Bloomberg reported recently. Examples include foreign-trained engineers whose promise of employment at LNG plants in Australia have evaporated as projects get delayed; development projects halted in Brazil resulting in the closure of international schools and the relocation of workers; and 8,000 Mexican workers left without paycheques after Petroleos Mexicanos slashed contracts and purchases, Bloomberg said. (…)
Investors Raise Alarm Over Liquidity Shortage Regulators also worried falling trading volumes could disrupt markets
(…) On Wednesday, the Bank for International Settlements became the latest major authority to sound the alarm, warning that it is becoming harder to trade in bond markets and that the problem could spill over into the real economy. Those comments echo concerns recently aired by the Bank of England, as well as the views of a slew of major bond-market investors and analysts.
Bond markets are “significantly less liquid than they used to be,” said Wolfgang Kuhn, head of pan-European credit at Aberdeen Asset Management Ltd. “The risks are becoming bigger with central banks pushing everyone [in the same direction]. You don’t want to be in a situation where this unwinds.” (…)
Global debt issuance has exploded since the financial crisis, with borrowers taking advantage of low interest rates. Bond funds have lapped up this supply, causing them to mushroom in size. As they have grown, their moves are more likely to cause ripples, or waves, as markets grow shallower.
BIS data show that in the U.S., broker-dealers who match buyers with sellers have seen their holdings as a share of the total bond market decline from 3.63% to 1.22%, indicating liquidity has fallen. While equivalent figures for Europe weren’t available, traders said a similar trend is playing out. (…)
The BIS also said in its report that many market participants say trading large amounts of corporate bonds has become more difficult and that market liquidity more widely could come to “depend on the portfolio allocation decision of only a few large institutions.” (…)
(…) On a year-over-year basis, the average price of new homes dropped 5.7% in February, after a 5.1% decrease in January and a 4.3% fall in December. It was the sixth month in a row of declines, based on The Wall Street Journal’s calculations from data released Wednesday by the National Bureau of Statistics. 
