Fed's Daly Stresses 'Patience' Message on Rate Cut Timing

The Federal Reserve needs more time and data to ensure inflation is truly subdued before cutting its key interest rate, Mary Daly, president of the Federal Reserve Bank of San Francisco and a member of the Fed’s policy committee, said at a conference of the National Association for Business Economics Friday.

Her comments stuck to the line repeated by other Fed officials in recent weeks: with inflation seemingly on a bumpy path down to the central bank’s goal of a 2% annual rate—but not quite there yet—and the economy and labor market staying resilient, they’re in no hurry to cut interest rates.

“The economy is healthy, price stability is in sight, and there is more work to do,” she said.

Daly and other members of the Federal Open Market Committee are at a crucial stage of their attempt to bring the economy down to a “soft landing” (rather than a crash) from the high inflation that flared up in late 2021. Since March 2021, the central bank has stifled inflation by raising its key interest rate, and has held it at a 23-year high since July, raising borrowing costs on all kinds of loans, which discourages spending and drags down economic growth.

Daly noted the progress against inflation. The Fed’s preferred measure of inflation rose 2.6% over the year in December, down from a peak of 7.1% in June 2022.

“For households and businesses, the treadmill of persistently rising inflation slowed down,” she said.

However, she said there was a risk that the forces that have driven down inflation—such as increasing worker productivity—could reverse, and that disruptions such as the conflict in the Middle East, could reignite inflation.

Daly said the Federal Open Market Committee’s December projection of three quarter-point rate cuts in 2024 was a “reasonable” one.

Fed's Bostic: Inflation on Path for Summer Rate Cut, More "Work To Do" on Inflation

Pointing to inflation measurements that were still too high, Atlanta Fed President Raphael Bostic said today that while price pressures in some categories needed to continue to moderate, inflation’s path appeared to set the Federal Reserve up to begin cutting interest rates in “summertime.”

Seeing only two rate cuts this year, Bostic told CNBC that inflation’s downward path would be “a little bumpy” with more “work to do,” citing the uptick in recent inflation reports like today’s wholesale prices data. 

While he reiterated the sentiment of other Fed officials that a strong economy gives the central bank time to wait for more data on inflation, he said there were some specific measurements that need to show improvements. 

For example, the Dallas Federal Reserve’s Trimmed Mean measurement of inflation has hovered around 2.6% for the past six months. And about a third of the basket of items measured for the Personal Consumption Expenditures (PCE) inflation index were still showing price increases of 5%. 

“So when you have lots of products with lots of price changes, it’s hard to imagine that you’re there yet,” he said of officials’ confidence that inflation would continue to fall to the 2% target. 

-Terry Lane

Bank Supervisors ‘Closely Focused’ on CRE Risks, Barr Says

Banking supervisors are “closely focused” on the commercial real estate (CRE) risks that are putting pressure on some financial institutions that are closely tied to the industry, Michael S. Barr, the Fed’s vice chair for supervision, told a banking conference this morning.

Barr said that Federal Reserve regulators are looking at several factors in how banks are handling commercial real estate loans, including how they measure and monitor risk, what actions have been taken to mitigate risks, how they report these risks to management, and whether they are financially prepared for future consumer real estate losses. 

Additionally, Barr pointed to the Fed’s report on the collapse of Silicon Valley Bank last year, noting that regulators “continue to evaluate” temporarily raising capital requirements on banks that have trouble managing their risks. 

In his comments to a Columbia Law School banking conference, Barr reiterated a concern among Fed officials that a weak market for office space was hurting the commercial real estate sector, which helps support the balance sheets of many banks. Those worries were heightened recently when Moody’s downgraded New York Community Bancorp Inc. (NYCB) over worries of its exposure to commercial real estate, which has been undercut by higher interest rates and work-from-home trends.

-Terry Lane

Consumer Sentiment Inches Higher; Inflation Worries Persist

Consumer sentiment improved in February, but not as much as economists were forecasting, while inflation expectations also inched higher to mirror recent moves in inflation.

The preliminary February results for the University of Michigan Index of Consumer Sentiment came in at 79.6, up from the 79.0 reading last month, and up 19% from the same month last year. However, economists were expecting the index to move up to 80.0. The largely flat move from last month comes after sentiment surged higher over the past two months.

“The fact that sentiment lost no ground this month suggests that consumers continue to feel more assured about the economy, confirming the considerable improvements in December and January across various aspects of the economy,” said Joanne Hsu, the survey’s director. 

The closely-watched data also showed that consumers expect year-ahead inflation to move higher to 3.0% in the February survey, inching up from 2.9% last month. The uptick comes as other inflation measurements showed that prices were proving to be stickier than anticipated, including a higher-than-expected Consumer Price Index reading this week. Short-term inflation expectations remained in line with pre-pandemic levels. 

Federal Reserve officials have said they follow consumer inflation expectations as part of their decision making process on setting interest rate levels. 

-Terry Lane

Fewer New Homes Are Being Built Than Expected

New housing starts, which had been ticking their way up for the past four months, took a sharp downturn in January, according to numbers from the Census Bureau Friday. There were 14.8% fewer new homes that started construction in January than there were in December, falling to an annual rate of 1.33 million. That number was 0.7% from January a year ago and was lower than the 1.45 million economists expected. Building permits, a precursor to housing starts, were also down in January and lower than economists expected. An annualized 1.47 million building permits were issued for single-family homes in January, 1.5% down from December's revised rate and 8.6% above January 2023. Housing starts have been closely watched as fewer people have been selling their existing homes. Rates have made many buyers reluctant to sell their homes—it would require them to trade their pandemic-era low-interest mortgages for ones now averaging 6.77%, according to Freddie Mac. That has put the onus on newly built homes to relieve the shortage of homes on the market. "A home building revival is coming, but it didn’t arrive in January," said Robert Frick, corporate economist for Navy Federal Credit Union. "High mortgage rates with maybe a dash of cold weather caused starts and permits to fall from December. We know that builders are ready to ramp up when rates fall, which could be as soon as spring." 

Wholesale Inflation Rises in January

Wholesale prices may have foreshadowed some consumer inflation growth in January.

Prices that producers are receiving for their goods and services grew 0.3% in January compared to the month prior. That's more than the 0.1% expected, according to economists surveyed by Dow Jones and the Wall Street Journal. Prices had decreased 0.1% in December, which had canceled out November's 0.1% increase.

Year-over-year prices grew 0.9%. That's down from 1% in December.

These prices, as measured by the Bureau of Labor Statistics' producer price index, are seen as a precursor to consumer inflation. When prices for producers are inflated, those costs are often passed along to the retailers selling the products, who in turn pass them on to the consumer.