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Reports Show Stumbling Economy on Eve of Fed Decision

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The Federal Open Market Committee gave us one last glimpse of the economy ahead of Wednesday’s policy announcement. The situation was one of slowing growth and decelerating inflationary pressures.

The housing market has struggled, wage growth has reportedly slowed, consumers have become more pessimistic, and manufacturing has faltered in some parts of the country. Declining wage pressures show that the housing market is still flooded but has not collapsed,” said Robert Kavcic, senior economist at BMO Capital Markets, in a statement.

In addition to its report on the state of the US economy, the International Monetary Fund indicated an improvement in the outlook for global inflation.

But those factors weren’t enough to change most Fed watchers’ expectations for Wednesday’s 25-point rate hike. Mounting evidence of an economic slowdown could have a significant impact on the future direction of Fed policy, but experts are not sure how and to what extent Fed officials will be affected. disagreement.

Ian Shepardson, chief economist at Pantheon Macroeconomics, said in a commentary that the central bank could pull back on rate hikes sooner or later, especially if wage growth slows.

“The message is clear: the Fed should not tighten any further,” he said. “It raises the odds of not raising rates in March from 60% to 70%,” he said.

That would be a departure from what the Fed suggested it would do. At its December meeting, members of the Federal Open Market Committee said rate hikes would only come to a halt after his two further 25-point rate hikes since February, with rate hikes expected to rise from 5% to 5.25%. expected to be in the range of

Joe Davis, global chief economist at Vanguard Group, said the Fed is likely to stick to its plan to continue raising rates at its next few meetings despite weaker economic data.

“The Fed is battling market, household and corporate expectations, and if inflationary pressures reappear if they fall below the final rate they set, it could harm the Fed’s credibility and its ability to respond effectively. It’s possible,” he wrote.

S&P CoreLogic Case-Shiller Home Price Index

Nationwide house price measures fell for the fifth straight month in November. The 0.3% drop in the index highlights the damage done to the housing market by the Fed rate hike and the resulting surge in mortgage rates. Year-over-year price growth slowed from 9.2% to 7.7%. Prices are currently down 3.6% since he peaked in mid-2022.

“Rising mortgage rates and low home prices are crushing the U.S. housing market,” said Matthew Walsh, an economist at Moody’s Analytics. ING’s chief international economist James Knightley said in a commentary that falling house prices could have a significant impact on overall inflation and the Fed’s response to it later this year.

“In a recessionary and on-target inflation environment, we expect the Federal Reserve to cut rates aggressively from the second half of the year,” he said.

Labor cost index

Hiring costs for private employers, including wages and benefits, rose 1% in the fourth quarter of 2022, the Bureau of Labor Statistics reports. This is his slowest pace since early 2021 and below economists’ expectations.

Wages and salaries are now up 5.1% for the year, slowing from a peak of 5.7% in the second quarter of 2022. Rapid wage increases will benefit workers’ budgets, but the Fed wants these increases to taper, fearing “wage growth.” -Price Spiral” feedback loop between price and salary. Fed Chairman Jerome Powell has expressed concern on several occasions that such a spiral could lead to uncontrolled inflation.

Pantheon economist Shepardson said the new wage data should reassure Powell and other decision-makers that the threat of such a scenario “is no longer real.”

Consumer confidence

Consumers were more pessimistic about their own financial and overall economic prospects in January, defying economists’ expectations of an improving outlook.

The Conference Board’s Consumer Confidence Index is down 1.7%, suggesting people are bracing for an impending economic downturn. The portion of the index that measures future expectations has plunged to levels historically associated with approaching recessions, the board said.

Consumer confidence is an important metric as it is believed to influence people’s spending decisions. Consumer spending is also the engine of economic growth in the country.

Despite growing fears of an impending recession, the survey showed that consumers remain optimistic about the job market. This will help the Fed stay on track with its rate hike plans, said Catherine Judge, economics director at CIBC Capital. The market, mentioned in the commentary.

Chicago Business Barometer

A measure of manufacturing activity in the Chicago area, considered a leading indicator of the direction of the US economy, fell to 44.3 in January. This marks the fifth consecutive month that the index has been below 50, indicating that business is shrinking. The index is based on a survey of manufacturing purchasing managers.

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