What has changed since the December FOMC meeting?

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This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The outcome of the Fed meeting of January 26-27 in terms of the federal funds rate is nearly certain. A federal funds rate will be left unchanged at 0%-0.25%. Economic data show noteworthy changes since the last FOMC meeting. The GDP estimate for the fourth quarter will be published on January 29. There is a widespread expectation of an inventory-led sharp increase in real GDP for the fourth quarter of 2009 after a 2.2% gain in the third quarter.


In the labor market, the employment numbers of December were mixed. The unemployment rate held steady at 10.0% but the participation rate has recorded the largest drop in the post-war period (64.6% vs. 65.8% in December 2008). Nonfarm payrolls declined 85,000 in December following a gain of 4,000 jobs in November. Initial jobless claims maintain a down ward trend, but the latest weekly tally shows a small uptick. More importantly, total continuing claims, including special programs continue to advance. In other words, layoffs have stabilized but hiring plans remain frozen. Therefore, labor market conditions remain a serious source of concern, nothing different from the December meeting.

Retail sales excluding gasoline posted a marginally higher gain in the fourth quarter compared with the third quarter. Retail sales in December per se were lackluster. Therefore, consumer spending continues to be held back by soft employment conditions, fragile balance sheets of households, and tight credit conditions. This is another economic indicator showing no noticeable positive change from the December meeting.

In the housing market, sales of existing homes have benefited from the $8000 first-time home buyer credit program more than new home sales. The December data for existing home sales will be published on January 25 and that of new home will be available on January 27. The Home Builders Survey for January indicated soft conditions. The bottom line here is that combined sales of new and existing homes have increased and inventories are shrinking more rapidly in the market for existing homes compared with that of new homes. Home prices are stabilizing with the year-to-year decline of the Case-Shiller Home Price Index showing a single-digit year-to-year drop compared with large double-digit declines seen earlier in the year. The main conclusion is that the housing market is stabilizing, with no striking change from December.

In the factory sector, the 0.6% jump in industrial production during December was largely from atypically cold weather accounting for increased production at the nation’s utilities. Factory production slipped 0.1% in December vs. a 0.9% increase in November. To this extent, the factory sector has failed to maintain the strength seen in November.

Inflation remains a non-issue, particularly given the projected soft pace of growth in final demand. The core CPI, which excludes food and energy, moved up 1.8% from a year ago in December and higher energy prices led to the 2.7% increase in overall CPI in 2009 after a string of eight monthly year-to-year declines in the period. The trade weighted dollar is quoted close to the December 16 (73.96) reading. Essentially, there is no noteworthy change in news on the inflation and exchange rate front.


In financial markets, credit spreads at the short-end are holding on to pre-crisis levels. At the more risky and long-end, the spread between Moody’s Baa and 10-year ten year Treasury Note yield has declined further in January compared with the spread in December (see chart 3).


Overall, the economic evidence suggests that there is not likely to be a significant change in the policy statement compared with the December meeting. The Fed’s exit strategy is the main topic of interest. It is premature for the Fed to reveal the blueprint for reduction in its accommodation at the present time. The Fed is treading on new ground here given the innovative programs in place and the evolution of the strategy will be tied to the nature of the recovery. There are concerns developing about the state of affairs if Chairman Bernanke is not confirmed as of January 31, 2010.

Source: Northern Trust – Daily Global Commentary, January 22, 2010.

* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

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