The U.S. economy held steady in early January with some regions experiencing modest declines in activity and others seeing slow growth, the Federal Reserve reported on Wednesday in its “beige book” survey.
The survey, taken on or before Jan. 9, collects impressions and data from the Fed’s 12 regional banks. It is used to help the Fed set monetary policy.
The summary of conditions will do little to change the Fed’s current plans calling for additional interest rate hikes this year, with one pegged for Jan. 31-Feb. 1 when its monetary policy committee meets. Analysts are overwhelmingly expecting the central bank to raise interest rates by 25 basis points, half the amount they increased rates at their last meeting in December.
Much of the summary confirms other accounts that residential real estate activity is weak, the labor market remains strong, and that inflation has slowed.
“On balance, contacts across districts said they expected future price growth to moderate further in the year ahead,” the survey said.
The release came on a day when officials said Fed Chairman Jerome Powell had tested positive for the coronavirus. Powell is isolating and working remotely, the central bank said.
Other economic reports have shown some sectors of the economy weakening. Housing sales are off by more than a third from a year ago while retail sales came in less than expected for December.
But the inflation picture is improving, with the consumer price index’s annual rate in December at 6.5%, down from 7.1% a month earlier, while the producer price index out Wednesday showed prices fell 0.5% last month, considerably more than anticipated.
“This was good news for the Fed, as the slowdown in demand and slowing producer inflation towards year end is a positive sign that the Fed’s more restrictive monetary policy is having a real impact in combating inflation,” said Sam Millette, fixed income strategist for Commonwealth Financial Network.
“While there is still work to be done to get price pressure under control, fixed income markets rallied on the news, as short and long term Treasury yields fell after this morning’s data releases in anticipation of potentially slower rate hikes going forward,” he added.
In an interview with The Associated Press, Cleveland Fed President Loretta Mester, considered one of the central bank’s more hawkish members, said the slowdown in inflation shows the Fed’s work raising rates is having its desired effect but added that further increases are still needed.
“We’re beginning to see the kind of actions that we need to see,” Mester said, “good signs that things are moving in the right direction. … That’s important input into how we’re thinking about where policy needs to go.”
The recent improvement in inflation has heartened the moods of builders, according to the National Association of Homebuilders. The group’s January survey of builder confidence, released Wednesday, showed a four-point increase in its index. While still at a low level, the increase to 35 marked the end of a 12-month period of declines.
“It appears the low point for builder sentiment in this cycle was registered in December, even as many builders continue to use a variety of incentives, including price reductions, to bolster sales,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Georgia. “The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023.”
The government will report housing starts and permits for December on Thursday with expectations of a slight drop in starts but a small uptick in permits. Existing home sales come out Friday and the forecast is for another drop in activity.
The combination of slowing economic activity and declining rates of inflation are a net positive for the Fed, but with it comes pain for consumers and businesses alike. The question as 2023 unfolds is whether that pain will prove temporary, as the Fed and the Biden administration once thought was the case with inflation, or lead to a more lasting malady for the economy.
“Today’s retail sales and PPI reports illustrate that the Fed is making progress in fighting inflation and while it’s unclear if it will cause the Fed to become more dovish, it at least implies that the central bank may not need to become more aggressive in raising rates and tightening liquidity,” said Jose Torres, senior economist at Interactive Brokers.
“Fed members understand that as soon as they lift their foot off the monetary policy brakes, the risk of another inflationary uptrend rises dramatically,” Torres added. “This is especially true when there’s a challenging global situation underpinning energy and transportation prices, like in the 1970s and 1980s. The Fed is no longer navigating an economy with plenty of disinflationary factors aiding its mission: it’s navigating the opposite, and the lessons of the 1970s and 1980s are calling on Powell to stay firm.”
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