March 16
Bloomberg
Federal Reserve officials repeated their pledge to keep the main interest rate near zero for an “extended period” and confirmed that emergency measures to prop up the housing market will end as planned this month.
While the economy has “continued to strengthen,” policy makers noted that “housing starts have been flat at depressed levels” and “employers remain reluctant to add to payrolls.”
Treasuries and stocks extended gains as some traders trimmed bets the central bank will raise interest rates over the next 12 months. Fed Chairman Ben S. Bernanke is trying to determine how long to hold down borrowing costs to generate a self-sustaining recovery from the worst slump since the 1930s.
“The recovery continues and remains on track to be subpar, at best,” said Diane Swonk, chief economist at Mesirow Financial in Chicago. “Businesses are finally stepping up to the plate and spending their cash flow, but the housing market and prospects for a broader-based recovery remain dim.”
The yield on the 10-year note Treasury note fell five basis points, or 0.05 percentage point, to 3.65 percent. The Standard & Poor’s 500 Index climbed 0.8 percent to 1,159.46.
An earlier report from the Commerce Department showed that housing starts fell 5.9 percent in February, hampered by snowstorms in some parts of the country, and Obama administration officials told a congressional hearing that unemployment is likely to “remain elevated for an extended period.”
Growth Outlook
The economy will probably grow by 2.8 percent in the first quarter of 2010, according to the median estimate of a Bloomberg News survey of economists this month, after a 5.9 percent pace of expansion in the fourth quarter of 2009 that got a boost from a slower pace of inventory reductions.
Policy makers are “still a little concerned about the handoff from the swing in the inventory cycle and fiscal policy to private final demand,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York.
Fed officials repeated that their program to buy $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt will be completed by the end of March.
“The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability,” the FOMC statement said.
Retail Sales
Retail sales unexpectedly climbed in February, consumer borrowing rose in January for the first time in a year and commercial mortgage-backed bond returns are accelerating. Meanwhile, the Fed’s preferred gauge of inflation, which excludes food and energy, has stayed tame.
Thomas Hoenig, president of the Kansas City Fed, dissented for the second straight meeting and said “that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability,” the statement said.
The Fed has kept the federal funds rate target for overnight loans between banks in a range of zero to 0.25 percent since December 2008. Policy makers began using the “extended period” language in March 2009 and have repeated it at each meeting since then.
Job Losses
Economic growth is helping to stanch job losses. Payroll declines have slowed to an average 27,000 a month from November through February, compared with an average 252,000 from July through October. The U.S. may add as many as 300,000 jobs this month, the most in four years, said David Greenlaw, chief fixed- income economist at Morgan Stanley in New York.
The unemployment rate was unchanged at 9.7 percent in February.
“Things are definitely getting better,” Jeffrey Immelt, chief executive officer of General Electric Co., said at a conference on March 11 in Washington. “The credit markets are much improved. Most indicators are firming or heading up.”
“But there’s a long road ahead,” with high unemployment and “big structural issues” in the economy, said Immelt, who is also a member of the New York Fed board.
Borrowers raised a record $1.24 trillion in the U.S. corporate bond market last year, according to data compiled by Bloomberg. While down from that pace, issuance this year remains elevated, with $248.3 billion raised.
Extra Yield
The extra yield investors demand to own corporate bonds rather than government debt fell yesterday to 267 basis points, or 2.67 percentage points, from the peak during the credit crisis of 888 basis points in December 2008, according to Bank of America Merrill Lynch indexes. The narrower spread represents annual interest savings of about $60 million for every $1 billion of bonds sold.
Inflation is showing little sign of taking off. The Fed’s preferred price index, which excludes food and energy costs, rose 1.4 percent in January from a year earlier, below the long- run range of 1.7 percent to 2 percent policy makers want for total inflation.
Policy makers believe the risk of inflation is low, with some still worried about deflation. Inflation expectations have remained stable in recent months, even with the excess capacity in the economy. Readings on one year-ahead inflation expectations tracked by the Thomson Reuters University of Michigan Survey have averaged 2.7 percent for the past six months, compared with 2.8 percent for the prior six months.
Labor Costs
Officials may also be concerned about the falling cost of labor, said Marvin Goodfriend, a former research director at the Richmond Fed. Labor costs dropped at a 5.9 percent pace in the fourth quarter, according to a report earlier this month.
“Today we cannot say we’re past the period of risk of deflation in unit labor costs,” said Goodfriend, now a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh.
In recent months, the scheduled end this month to Fed purchases of mortgage debt has prompted little change in mortgage rates. The rate for 30-year fixed mortgages fell to 4.95 percent for the week ended March 11 from 4.97 percent, compared with a record low of 4.71 percent in December.
Sales of previously owned U.S. homes unexpectedly declined in January for a second month, falling 7.2 percent to an annual pace of 5.05 million, the National Association of Realtors said Feb. 26.