Several Federal Reserve officials said the central bank should begin tapering its quantitative easing program later this year and stop it by year end, minutes of their March meeting showed.
Bloomberg reported that the Federal Open Market Committee (FOMC) members “thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end,” according to the record of the March 19-20 FOMC meeting released today in Washington ahead of the regularly scheduled 2 p.m. time.
Fed officials, who met before a Labor Department report last week showed payroll growth in March was the slowest in nine months, debated how and when to curtail asset purchases that have swollen its balance sheet to a record $3.22 trillion. The committee, led by Chairman Ben S. Bernanke, decided at the gathering to press on with $85 billion in monthly bond buying until the labor-market outlook has “improved substantially.”
“Clearly the Fed was contemplating the timing of a tapering in asset purchases,” said Nathan Sheets, former international-finance director at the Fed and now global head of international economics at Citigroup Inc. in New York. “But my feeling is the last week’s employment report has put such discussions on hold. They must now be in wait-and-see mode to see what happens with the labor market.”
The Fed meeting was held before the Labor Department’s jobs report showed the economy added 88,000 jobs in March, less than the most pessimistic forecast in a Bloomberg survey. A shrinking labor force helped reduce the unemployment rate to a four-year low of 7.6 percent.
American employers hired at the weakest pace in nine months in March, a sign that tax hikes that kicked in early this year as part of Washington’s austerity drive could be stealing momentum from the economy.
Reuters reported that the economy added just 88,000 nonfarm jobs last month, the Labor Department said on Friday.
“The U.S. economy just hit a major speed bump,” said Marcus Bullus, trading director at MB Capital in London.
Some of the weakness appeared due to tax hikes enacted in January. While prior reports have pointed to relatively buoyant retail sales in January and February, Friday’s data showed retailers actually cut staff in March by 24,100, making it the hardest-hit sector last month.
Moreover, the government said hiring in the retail sector was weaker in January and February than initially thought.
The report rattled investors, sending U.S. stocks lower and putting them on pace for their poorest weekly performance this year. Benchmark Treasury debt yields fell to their lowest this year and the dollar declined against a basket of currencies.
It was unclear whether across-the-board federal budget cuts that began in March played a role in the weak pace of hiring, although nervousness over the cuts might have made businesses shy about taking on more staff.
Some economists cautioned against reading too much into the report, though the data nonetheless raised questions over whether the strong hiring seen in the winter actually meant the economy had shifted into a higher gear.
“We don’t think there is enough signal here to conclude the U.S. economy is wobbling. Rather, it appears that the underlying trend has not improved as much as the January-February data suggested,” said Julia Coronado, chief North America economist at BNP Paribas in New York.
March’s slowdown in job growth could make policymakers at the Federal Reserve more confident about continuing a bond-buying stimulus program. Prior advances in the labor market recovery had fueled discussion at the central bank over whether to dial back the purchases, perhaps as soon as this summer.
“This could give them the green light to stay with this policy longer,” said Brian Rehling, chief fixed income strategist at Wells Fargo Advisors in St. Louis.
Consumer spending in the U.S. climbed in February by the most in five months as incomes rose, signaling an improving job market is spurring demand, according to a Bloomberg report.
Household purchases, which account for about 70% of the economy, gained 0.7% after a 0.4% advance the prior month that was bigger than previously estimated, a Commerce Department report showed today in Washington. The median estimate in a Bloomberg survey of 78 economists called for a 0.6% rise. Incomes increased 1.1%, more than projected, sending the saving rate up from a five-year low.
Labor market progress and an increase in household wealth linked to rising home values and stocks are helping Americans cushion the fallout of higher payroll taxes and costlier fuel. Strength in purchases is one reason economists project the economy picked up this quarter after slowing to a 0.4 percent annual rate in the final three months of 2012.
“The economy is in a very good place right now ahead of the fiscal restraint,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “This recovery is sustainable. Consumers are in the driver’s seat.”
Stock markets in the U.S. were closed today for the Good Friday holiday.
Projections for spending ranged from gains of 0.3% to 0.9%. The January reading was previously reported as an increase of 0.2%.
Consumers’ confidence has wobbled in March — but economists’ confidence is rising quickly.
USA Today reported that even as the Conference Board reported Tuesday (March 27) that budget fights in Washington dragged down its consumer confidence index for March, economists are quietly raising forecasts for first-quarter economic growth to as much as a 3% annual clip.
That’s well above the 1.8% median in a USA Today survey of economists last month. Economists’ improving outlooks also come despite the increases in middle-class payroll taxes and top-bracket income-tax rates on Jan. 1 and the beginning of sharp federal spending cuts on March 1.
The conflict is about watching what people do, not what they say.
Forecasts have been raised both because consumers have spent more than expected and because business executives who had reported being rattled by the uncertainty from Washington have raised investment anyway.
The latest evidence was the 5.7% gain in durable-goods orders for February announced Tuesday, said Michael Hanson, an economist at Bank of America Merrill Lynch. Faster jobs growth has also helped, said UBS economist Drew Matus.
“Jobs trump Washington folly,” Matus said. “The primary driver is that people aren’t worried about being laid off any more.”
The latest forecasters to change their first-quarter outlooks include:
• Bank of America Merrill Lynch, which says the economy is growing at a 3% annual clip this quarter, up from a 1% forecast at the end of the year. The bank says richer consumers, buoyed by rising stocks and home prices, are leading the way.
• Barclays, which said Tuesday that the durable goods report put first-quarter growth on a 2.6% annual pace, up from 1.5% in December.
• JPMorgan Chase raised its forecast to 2.7% from 2.3% Tuesday, citing more inventory growth.
• IHS Global Insight, which is up to 2.9% projected growth from 1.0% in mid-January.
The government estimates the economy grew only 0.1% in the fourth quarter, but a new estimate due Thursday is expected to be as high as 0.7%.
The Conference Board said its consumer confidence index fell 8.3 points to 59.7 this month, on a scale in which 100 reflects the level of confidence in 1985. But the index rose 9.6 points last month, leaving confidence about the same as two months ago.
Consumers are wavering between worrying about Washington and feeling better about their own finances amid recovering housing and job markets.
An example of the latter is Tuesday’s Standard & Poor’s/Case-Shiller Index report, showing January home prices staged their biggest 12-month gain since 2006, said Conference Board economist Ken Goldstein.
Consumers who have been replacing worn-out cars as that industry recovers from the recession need furniture and appliances too, he said.
“I’m not sure they’ve really made up their mind,” Goldstein said.
“If it was just about the economy, and about economic indicators, we would not be seeing the zig-zag in consumer confidence. My guess is that consumers will decide that they’ve waited so long to buy appliances and furniture that they will decide it’s time.”
Federal Reserve officials Wednesday (March 20) acknowledged the recent pick-up in economic growth, noting in particular “labor market conditions have shown signs of improvement,” but the central bank made no change in its ongoing aggressive stimulus programs.
The Los Angeles Times reported that Fed policymakers, after their two-day meeting, voted 11 to 1 to keep buying $85 billion of Treasury and mortgage securities every month.
And as expected, they left the short-term interest rate at near zero, where it has been since late 2008. Fed policymakers repeated they would keep the interest rate at that level as long as the jobless rate is above 6.5% and the inflation outlook remains close to its target rate of 2%.
Most Fed officials don’t see the unemployment rate, currently 7.7%, reaching 6.5% until 2015.
Despite the recent improvement in the economy, the Fed’s updated economic outlook actually forecast growth this year to come in slightly less than the central bank’s previous projections in December.
That is presumably because of the federal spending cuts that kicked in March 1 under sequestration, something the Fed pointed to in its statement Wednesday, saying “fiscal policy has become somewhat more restrictive.”
The Fed reduced its forecast for economic growth this year, saying the economy would expand at no greater than 2.8%, down from a projected maximum of 3% made in December.
At the same time, the Fed lowered its projection for the unemployment rate, saying it would range from 7.3% to 7.5% by the fourth quarter. The forecast in December was 7.4% to 7.7%.
The latest statement from the Fed, coming after a two-day policy meeting, has been eagerly anticipated as the economic recovery has accelerated in recent weeks.
Job growth in February exceeded analyst expectations. The economy added 236,000 net new jobs that month and the unemployment rate fell to 7.7%, the lowest level since the end of 2008.
Since 2008, the Fed has been engaged in unprecedented attempts to stimulate the economy by keeping short-term interest rates near zero and dramatically expanding its balance sheet.
The central bank’s latest, and most ambitious, effort began in the fall as the Fed began purchasing $85 billion in bonds a month to hold down long-term interest rates in hopes of increasing spending by businesses.
Confidence among American consumers unexpectedly slumped in March, which may signal a cooling in spending, the biggest part of the economy.
According to a report by Bloomberg, the Thomson Reuters/University of Michigan preliminary sentiment index for March fell to 71.8, the lowest level since December 2011, from 77.6 in February. The gauge was projected to increase to 78, according to the median estimate of 67 economists surveyed by Bloomberg.
Concern may be starting to mount over the damage that automatic across-the-board federal spending cuts will cause the economy and hiring. That may keep tempering optimism created by record stock prices, a hiring pickup, and a housing rebound that have so far helped propel bigger-than-forecast gains in spending.
“There was a little bit of a sequester-news related dip in confidence,” said Jim O’Sullivan, chief U.S. Economist at High Frequency Economics in Valhalla, New York. “Certainly on the minus side you have fiscal tightening, but on the plus side you’ve got the improving labor market.”
Forecasts ranged from 70 to 82.5, according to the Bloomberg survey. The index averaged 64.2 during the recession ended in June 2009, and 89 in the five years prior to the 18- month slump.
Consumers in today’s confidence report said they expect an inflation rate of 3.3% over the next 12 months, the same as in the prior two months. Over the next five years, Americans expected a 2.9% rate of inflation, down from February’s 3%.
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Sales at U.S. retailers rose in February by the most in five months as an improved job market and stronger household finances cushioned the effect of higher payroll taxes, according to a report by Bloomberg.
The 1.1% advance exceeded all projections in a Bloomberg survey and followed a revised 0.2% gain in January, Commerce Department figures showed today in Washington. The median forecast was for a 0.5% advance. Sales excluding the volatile categories of autos and gasoline rose 0.4%.
Progress in the job market is shoring up sentiment and spurring demand at merchants including Costco Wholesale Corp., easing the burden of a two percentage-point increase in the levy that funds Social Security. The boost to household wealth from home values and stock prices has also helped consumers maintain spending in the face of higher fuel prices.
“It shows some steady underlying strength,” said Terry Sheehan, an economic analyst at Stone & McCarthy Research in Princeton, New Jersey, the second-best forecaster of retail sales in the last two years, according to data compiled by Bloomberg. “These numbers are cause for cautious optimism.”
Eight of 13 major categories showed increases last month, led by a 5% jump in receipts at gasoline stations that reflected higher fuel costs. Sales also climbed at building materials outlets, auto dealers and general merchandise stores.
Spending increased 1.1% at auto dealerships in February after a 0.3% drop a month earlier.
Pent-up demand for motor vehicles contributed to the increase as an aging fleet and cheap borrowing drew customers to dealer lots. Cars and light trucks sold at a faster pace in February, pushing the annualized rate of sales to 15.3 million from 14.4 million a year ago, according to data from Ward’s Automotive Group.
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Friday’s jobs report showed that U.S. labor markets are making progress, but likely not enough to convince Federal Reserve officials that it’s time to pull back on the easy-money programs they’ve put in place to rev up economic growth and hiring.
According to a report by The Wall Street Journal, when the Fed next meets March 19-20, officials are likely to acknowledge job-market improvements in recent months. But their recent comments suggest they are unlikely to shift from their plan to purchase $85 billion per month of Treasury and mortgage-backed securities to help keep short-term interest rates pinned near zero.
Much of the research coming out of the Fed in recent months has found notable benefits from bond buying in the form of lower long-term interest rates, which help to drive spending and investment, particularly interest-sensitive sectors like housing. However internal and outside critics worry the programs could fuel higher inflation or market instability
Top Fed officials have made clear that the labor market’s health is their primary worry right now, and it’s the main factor in determining how long they will continue the bond-buying program. The Fed has said it wants to see “substantial progress” in the job market before pulling back on bond buying, which would require several more encouraging job reports like Friday’s.
Payroll gains have averaged 205,000 per month for the past four. That’s one important sign of progress, but Fed officials have reservations about concluding too quickly that the job market has healed or that the outlook for job growth has turned substantially better.
The unemployment rate, at 7.7% in February, is little changed since September, when it was 7.8%. Fed Vice Chairwoman Janet Yellen in a speech Monday, said “the unemployment rate is probably the best single indicator of current labor market conditions.”
Other details in Friday’s unemployment statistics suggested a job market not yet back to full health. More than 100,000 Americans left the labor force in February and the share of the population that’s employed, at 58.6%, hasn’t improved in the past year. Meantime, the share of workers who have been unemployed for six months or more inched up in February, as did the number of Americans who wanted full-time work but could only find part-time jobs.
President Barack Obama and Senate Republicans had a constructive conversation about fiscal policy and other matters on Wednesday (March 6) night, a White House spokesman said, but neither the administration nor the GOP on Thursday predicted a quick agreement about taxes and spending.
According to a report by MarketWatch, Obama “said that there seemed to be sincere interest in avoiding constant crisis, sincere interest expressed by the participants in the dinner,” White House press secretary Jay Carney told reporters at a regular briefing.
But he followed up by saying, “We’re not naive about the challenges that we still face. They exist and there are differences.”
Sen. Pat Toomey, a Pennsylvania Republican who was one of a group of Republican senators that dined with Obama at a Washington restaurant on Wednesday night, said Thursday that the meeting was “very cordial” and “substantive.” He also underscored Republicans’ push for deep spending cuts and the party’s opposition to tax increases, which lawmakers will wrestle with beginning next week as each party offers fiscal 2014 budgets.
“Unless we curb the spending and bring spending under control,” Toomey said after a speech at the Heritage Foundation, “we’re not going to have the kind of growth we need.”
Early next week, House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, is planning to unveil his plan to balance the government’s budget in 10 years. A competing blueprint is expected from Senate Budget Committee Chairman Patty Murray, a Washington Democrat.
Given the parties’ fundamental disagreement over tax increases, the documents will set the stage for more wrangling over fiscal policy just as the government approaches a late-March deadline to pass separate stopgap funding. Without passing a short-term bill by March 27, the government would face a partial shutdown. The House has passed a bill to avert the shutdown by funding the government through the end of the current fiscal year on Sept. 30, and the Senate is preparing to act on that measure.
Automatic budget cuts set to go into effect this week will slow the already sluggish U.S. economy even further, Federal Reserve Chairman Ben Bernanke warned senators Tuesday (Feb. 26).
According to a report by CNN Money, the recovery is already moderate as it is, and upcoming cuts add an additional “significant” burden, Bernanke said in prepared testimony.
Forecasts from the Congressional Budget Office suggest that deficit-reduction policies — including the automatic cuts taking effect Friday — will slow the U.S. economy by 1.5 percentage points this year. Bernanke cited those figures in his testimony, a semi-annual report to Congress.
“Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions,” he said in prepared testimony.
Bernanke has long warned lawmakers that monetary policy, which the Federal Reserve oversees, can only do so much to boost the U.S. economy. He said Congress needs to reduce the deficit over the long term without threatening short-term economic growth.
“The sizes of deficits and debt matter, of course, but not all tax and spending programs are created equal with respect to their effects on the economy,” he said.
Bernanke urged Congress to consider tax and spending policies “that increase incentives to work and save, encourage investments in workforce skills, advance private capital formation, promote research and development, and provide necessary and productive public infrastructure.”
“Although economic growth alone cannot eliminate federal budget imbalances, in either the short or longer term, a more rapidly expanding economic pie will ease the difficult choices we face,” he said.
Bernanke also came to the hearing prepared to defend the Fed’s stimulus efforts against its critics.
Under more normal circumstances prior to the Great Recession, the Fed typically operates by lowering interest rates to spur economic growth, or vice versa.
But with short-term rates already parked near zero, the Fed has turned to alternative policies that include purchasing mortgage-backed securities and long-term Treasury bonds.
Those bond purchases are intended to lower interest rates even further. But they worry many observers who wonder if the Fed will be able to pull back the policy when the economy eventually gets going again at a stronger pace.
Responding to those criticisms, Bernanke said Tuesday that he “remains confident that it (the Fed) has the tools necessary to tighten monetary policy when the time comes to do so.”