Fed Sets Stage for Rate Hikes The Federal Reserve took a delicate step toward raising short-term interest rates in 2015, but at the same time exposed its skittishness about signaling a historic move away from easy-money policies in place since the global financial crisis.
In a statement Wednesday after a two-day policy meeting, the Fed broached the prospect of “beginning to normalize the stance of monetary policy,” the most direct formal reference to raising rates it has made in years.
The new statement said the Fed would be “patient” before raising rates, adding that the overall outlook hadn’t much changed from earlier assurances that rates would stay low for a “considerable time.” (…)
“The committee considers it unlikely to begin the normalization process for at least the next couple of meetings,” she said. “This assessment, of course, is completely data-dependent,” she added, meaning it will depend on the path of the economy.
The central bank’s next scheduled policy meeting is Jan. 27-28. The following is March 17-18. (…)
In forecasts released with the statement, officials said they expected rates to end up anywhere between 0.375% and 4% by the end of 2016. Within that range, 17 officials project 13 different points where interest rates might end up.
Fifteen of 17 policy makers said they expected to raise short-term interest rates in 2015 and their median estimate—meaning half of estimates were above and half below—put short-term borrowing rates at 1.125% in 12 months. The median rate estimate for 2016 was 2.5% and for 2017 was 3.625%.
Those estimates are all modestly lower than the Fed projected in September, meaning that even though officials continue to expect to move rates up next year, they see a very gradual approach once they start. The estimates—though preliminary and subject to change—imply Fed officials have in mind four quarter-percentage point moves in 2015. (…) (Chart below from BloombergBriefs)
Fed officials are sticking to their view that the downward pressure on inflation will be sharp but short-lived. Officials projected 1.0% to 1.6% consumer price inflation in 2015, a large downward revision from earlier estimates. But they saw it returning to between 1.7% and 2.0% in 2016 and between 1.8% and 2.0% in 2017.
Ms. Yellen said the Fed would start raising rates as long as it was “reasonably confident” that inflation would move back to the 2% goal.
The above chart points where the Fed thinks short term rates will be in one year. At 1.1%, if Treasury rates stay at 2.2%, the 120 Yield Spread will drop to 110…But that’s only in 12 months…Still, it gives an ideas what “normal” rates should be.
(…) In fact, she said Wednesday at her post-policy meeting press conference, falling oil prices are a net positive for the U.S. economy even if they weigh on inflation for a time. (…)
Ms. Yellen conceded that lower oil prices could lead to “reduced drilling activity” and less capital investment in domestic production efforts. But “on balance, I would see these developments as a positive for the standpoint of the U.S. economy,” she said.
Not so much for Russia, which Ms. Yellen said “has been hit very hard by the decline in oil prices, and the ruble has depreciated enormously in value.”
But developments in Russia likely won’t hurt the U.S. economy, she said.
Trade and financial links between the U.S. and Russia “are actually relatively small,” Ms. Yellen said, and “spillovers to the United States, both through trade and financial channels, would be small.”
Europe, though, is “somewhat more exposed to Russia,” she said.
Some reactions (WSJ):
- “What was the point! The last FOMC meeting of 2014 was not just a disappointment, the outcome was plainly bizarre, if not outright confusing. For a Fed that seeks to introduce more clarity and transparency of its views, they have in fact done the opposite. The tortuous, semantic-conscious language of the statement is really an exercise in obfuscation, one that harkens back to the days of Alan Greenspan. In stark contrast to this now stale Fed note is the fact the U.S. economy is unambiguously stronger and more dynamic than anytime we have seen in at least a decade. Frankly, I think the FOMC has done the institution some harm. By retaining the ‘considerable time’ phrase, we begin to worry whether the Fed is now falling behind the economic cycle. Slipping in the term ‘patient’ changes really nothing.” –Bernard Baumohl, The Economic Outlook Group
- (…) the current verbiage ties the fed funds liftoff explicitly to economic criteria, namely inflation. Bottom line: If inflation does not trend toward 2% next year, then the Fed will not begin raising interest rates.” –Joseph LaVorgna, Deutsche Bank
A European Central Bank executive board member, in an interview with The Wall Street Journal, sent one of the clearest signals to date that the ECB is poised to embark on large-scale asset purchases early next year, as the bank grapples with a weak economy and dangerously low inflation.
ECB board member Benoît Coeuré also provided details of the ECB’s plans to publish minutes of its policy meetings starting next year, saying the accounts should be released four weeks after meetings and will be “substantial” in providing the balance of views among officials.
“I see a broad consensus around the table in the governing council that we need to do more” to raise inflation and boost the economy, Mr. Coeuré said at his office in the ECB’s new skyscraper headquarters in Frankfurt. (…
Mr. Coeuré’s comments were noteworthy in that they suggest that the central bank’s threshold for action has now largely been met, and that officials have moved to the design phase of a quantitative-easing program focused on government bonds. (…)
From Bloomberg:
“The ECB has built up enough credibility on its own,” said Holger Schmieding, chief economist at Berenberg Bank in London. “That the Bundesbank may object to sovereign-bond purchases is largely taken for granted by markets. Tacit support from Berlin would neutralize Bundesbank objections in the German public debate.”
German Business More Bullish German business confidence improved for the second consecutive month, a key indicator showed, as the eurozone’s largest economy benefits from lower oil prices and a weaker euro.
The Munich-based Ifo Institute’s lead indicator rose to 105.5 in December, after the previous month’s 104.7. (…) Earlier this week a separate indicator of economicconfidence strongly outperformed analysts’ forecasts. The ZEW index rose to 34.9 in December versus 11.5 in the previous month.
The consumer price index fell 0.3% during November (+1.3% y/y) following unrevised stability during October. It was the largest monthly decline since December 2008 and outpaced expectations for a 0.1% dip in the Action Economics Forecast Survey. A 3.8% energy price decline (-4.9% y/y) led the CPI lower. Prices excluding food & energy ticked up an expected 0.1% (1.7% y/y) after a 0.2% rise.
Energy prices were pulled lower by a 6.6% drop in gasoline prices (-10.5% y/y). Prices have fallen 14.3% during the last five months. Fuel oil prices declined 3.5% (-10.1% y/y) while natural gas prices eased 1.7% (+3.2% y/y), the sixth decline in the last seven months.
Prices for goods excluding food & energy declined 0.4%, pulled down by a 1.3% drop in appliance costs (-4.9% y/y) and a 1.1% decline in apparel prices (-0.4% y/y).
Core CPI has been rising at 1.2% annualized rate in the past 6 and 4 months (table from Cleveland Fed).
The Mortgage Bankers Association reported that their total Mortgage Market Volume Index fell 3.3% last week (-3.9% y/y). Applications to purchase a home fell 6.9% (-5.3% y/y) but application to refinance were little changed (-3.0% y/y).
Raymond James adds:
Recent housing data points have turned choppy again. December homebuilder sentiment fell slightly, the MBA builder application survey fell 13% in November, and single-family permits also fell 1% last month. Also, the NAR’s Realtor Confidence Index showed a drop in October for current sales expectations and the six-month outlook, roughly 10-15% below year-ago levels.
Oil’s Plunge Is Pushing Mortgage Rates Down Low oil prices may offer a hidden gift to consumers beyond the gas pump: They could also indirectly support lower mortgage rates.
(…) “I am optimistic about the future. What we are facing now and what the world is facing is a temporary situation and will pass,” Mr Naimi told the country’s press agency.
Mr Naimi blamed the sharp falls in price on an increase in non-Opec supply at time when demand was slowing down amid weaker economic growth. But he said the market “must not forget the negative role of speculators” in causing volatility.
Mr Naimi rejected any link between the kingdom’s oil policy and wider political motives, saying it was difficult for the Gulf nation and other members of Opec to reduce output and sacrifice market share. (…)
Striking an optimistic tone, Mr Naimi said he expected demand for crude to grow when the rebound in the global economy gathers pace. He also pointed out that the Kingdom has the ability to withstand a period of lower prices because of its large foreign exchange reserves.
Although the Kingdom would push ahead with its policy to let the market determine prices and balance supply and demand, Mr Naimi revealed that Opec had sought co-operation from other oil producers, but “those efforts were not successful”. (…)
(…) Oil’s free fall has now washed through all quarters of the energy sector, hitting capital plans from oil sands and shale zones in Alberta to the Grand Banks offshore Newfoundland and Labrador, and the icy waters of the Beaufort Sea.
Husky lowered its 2015 budget by a third to $3.4-billion, from $5.1-billion this year, as spending winds down on its Liwan gas project in the South China Sea and its Sunrise joint venture in the oil sands. The Calgary-based company, controlled by Hong Kong mogul Li Ka-shing, said it would delay a multibillion-dollar expansion at its White Rose field offshore Canada’s East Coast for one year as it hunts for cost savings.
Oil sands player MEG chopped its 2015 spending plan to $305-million, down 75 per cent from $1.2-billion originally. Penn West Petroleum Ltd., pressured by high debt , slashed its budget next year by $215-million and cut its quarterly dividend by 78.5 per cent. Also Wednesday, U.S. oil major Chevron Corp. scrapped plans to drill in Arctic waters, citing “economic uncertainty.” (…)
(…) House prices on new homes fell by an average of 3.6 per cent in November from a year earlier, according to Financial Times calculations based on the government’s survey of 70 large and medium-sized cities. That is the largest annual drop on record since the government stopped publishing nationwide price data at the beginning of 2011.
But on a monthly basis, November’s data showed signs of improvement. New house prices fell by 0.6 per cent in November from a month earlier, down from declines of 0.8 per cent in October and 1.0 per cent in September. (…)
“The pace of destocking in various cities is accelerating . . . There is hope that first-tier cities will halt their monthly declines and begin a rebound by the year-end.”
Indeed, data out last week showed property sales volume at an 11-month high in floor-area terms in November, although it was still down 13 per cent from a year earlier. (…)
SENTIMENT WATCH
(…) The Dow Jones Industrial Average closed up 288 points, finishing with its best performance this year.
Thursday morning stocks in Europe are rallying, and the story was the same in Asia.
And all it took was a couple of words. By adding that it will be “patient” in its approach to increasing short-term interest rates and surprisingly maintaining wording that it will be a “considerable time” until borrowing costs rise, the Fed calmed market jitters about the start of tighter monetary policy against a backdrop of slow global growth and disinflation. (…)
Since 1969, the S&P 500 has averaged a 1.5% gain during the last five trading days of the year and first two sessions of the New Year, according to Stock Trader’s Almanac. The so-called “Santa Claus Rally” has held true for the past six years as stocks have risen. (…)
In every other pullback this year, excluding October, the buy-the-dippers came in when stocks were down 5%, noted Art Cashin, UBS director of floor operations at the NYSE. (…)
Here’s a truly amazing chart:
BTW: Total electricity consumption was up 3.3% YoY in November vs up 3.1% in October and down 2.7% in September. Consumption in all of 2013 was up 7.3%, after +5.5% in 2012 and 12.0% in 2011. (Chart from RBC Capital)
