Consumers Power Ahead; Businesses Disappoint

Consumers jumped on discounts and credit to leverage their incomes in November, with spending slightly outpacing solid, inflation-adjusted, disposable income gains during the month. Spending on big-ticket vehicles and holiday gifts both bounced back Read More »

The First Step

Federal Reserve Chair Janet Yellen successfully corralled the cats, achieving a unanimous vote by the Federal Open Market Committee (FOMC) to lift the fed funds rate by one quarter point to a range between 0.25% to 0.50%. The unanimous vote came with a compromise. The FOMC reinstated a form of forward guidance, stating that the Federal Reserve will be watching for “actual as well as expected progress toward its inflation goal.” The statement also underscored that future rate hikes will be glacial. The Fed lowered the trajectory for interest rates in 2017 and 2018 slightly, but held to a trajectory of four rate increases in 2016, more than we or the market expected. Note: The Fed has consistently underestimated inflation.

The more interesting issue is how the Fed expects to raise rates; it’s complicated. The levers that the Fed has to use are new and untested in the magnitude that will be necessary to raise rates. Distortions in the yield curve are likely. Traders at the trading desk of the New York Fed will be working to mitigate any distortions that arise, while we enjoy our holidays. Trading to begin raising rates begins tomorrow, so stay tuned. This is another reason for gradualism; financial markets will need time to adjust.

Bottom Line: Seven years to the day after interest rates fell to zero, we are finally leaving that mark. The question is whether we can stay off it. Yellen will do all she can to make sure the Fed doesn’t repeat the mistakes of other central banks. The Yellen Fed will move gradually and wait for overall economic activity show some signs of actual heat before doing anything aggressive on rates. We could use a warmer economy; with any luck, we may get it. Today’s rate hike is affirmation we are at least out of the deep freeze.


Mild Weather Takes Toll on Production

Industrial production slipped another 0.6% in November with unusually mild winter weather adding to the toll the manufacturing sector has already been experiencing in the face of a strong dollar and an overhang of inventories. Production at utilities plants plummeted Read More »

Housing Starts Post Solid Gains

Housing starts jumped at a double-digit rate to a 1.17 million-unit, annualized rate in November following slight upward revisions to October. Gains occurred in both the multifamily and single-family Read More »

CPI Firms Year-on-Year

The Consumer Price Index (CPI) flattened out the during the last two months as falling prices at the gas pump pulled down the overall index once again. However, we are finally starting to see some firming on a year-over-year basis with the CPI edging up 0.5% from a year ago. The reason is that we are finally hitting a phase in which the year-over-year comparisons look a little better on inflation even as oil prices continue to fall. Read More »

Yellen’s Big Test

Yet another round of market jitters, triggered by plummeting oil prices (OPEC has lost control of the oil market) and related problems in the high-yield bond market have raised questions about whether the Federal Reserve will actually pull the trigger and finally lift short-term interest rates from the zero bound. The moves we saw overnight in Asia and Europe weren’t exactly encouraging.

Will market volatility further delay liftoff? Read More »

Retail Sales Sparkle

Retail sales rose 0.2% in November, broadly in line with expectations. Excluding automobiles, gasoline, building materials and food services, core sales increased 0.6%. Read More »

Employment Gains Cinch Liftoff

Payroll employment jumped 211,000 in November and was revised up significantly for October and September. Gains were broad-based. The only major exceptions were mining, which continues to be hammered by low oil prices, and manufacturing, hit by the strong dollar and overhang of inventories. The good news is that the economy is more than absorbing those losses, most notably with gains in domestic demand. Read More »

Employment Data Forecast for November

Payroll employment is expected to rise by 185,000 in November after surging a surprising 271,000 in October. That would bring trend job creation close to a 200,000 norm. Private employment is expected to increase by 180,000, Read More »

Manufacturing Falters, Construction Improves

The Institute for Supply Management (ISM) index dropped to 48.6% in November, affirming other evidence that the manufacturing sector is now in a contraction. Losses were fairly broad-based with the exception of employment, which moved back above the 50% threshold in November. Read More »