Fed's Schmid Urges Patience on Rate Cuts as Service Prices Remain High

Kansas City Federal Reserve Bank President Jeff Schmid has joined the list of officials in the wait-and-see camp on inflation.

In remarks to the Economic Club of Oklahoma City on Monday, Schmid signaled that the Federal Reserve should continue to be “patient” and wait for stronger evidence of slowing inflation before cutting interest rates.  Schmid said the decline in inflation from last summer’s peak was largely the result of a slower rise in energy and goods prices, the product of better supply chains and a more balanced oil market. However, these gains likely wouldn’t push inflation down enough to meet the Fed’s 2% target, with the rest likely needing to come from slower price growth in services. “The prices of services—which comprise two-thirds of consumer spending—continue to rise briskly amid still tight labor markets and elevated wage growth,” Schmid said. “Given the importance of labor costs for many service providers, restoring balance in labor markets and moderating wage growth will likely be needed to secure inflation’s return to the FOMC’s 2% target.”

Schmid, who was appointed to his position in August 2023, echoed other Federal Reserve officials in preaching patience on interest rate cuts, which most investors now believe are unlikely to happen at the next Federal Open Market Committee (FOMC) meeting. Fed officials will get more data on inflation’s path with Thursday's report on Personal Consumption Expenditures. 

-Terry Lane

Consumer Confidence Falls on Job Market Jitters

Maybe consumers aren’t as confident to start 2024 as some surveys initially suggested. 

The Conference Board’s Consumer Confidence Index fell to 106.7 in February, while the January results were also revised lower by about 4 points to 110.9. The slide came after three consecutive months of gains in the index and was well below economists' expectations of 115.1.

While consumers reported worries about general near-term economic conditions, there was more optimism on inflation. Consumers said they anticipate inflation to be at 5.2% in the next 12 months, the lowest response given since March 2020, and well below expectations of nearly 8% inflation in mid-2022. Federal Reserve officials have said they pay attention to consumer expectations on inflation when evaluating whether to cut interest rates. 

“February’s write-in responses revealed that while overall inflation remained the main preoccupation of consumers, they are now a bit less concerned about food and gas prices, which have eased in recent months,” said Dana Peterson, Conference Board chief economist. 

The survey also revealed that more consumers were harboring worries about the labor market, with fewer saying that jobs were “plentiful” and more saying they were “hard to get.”

"Americans feel the job market tightening and understand that while the rate of inflation is lower, it remains uncomfortably high. In the case of jobs, the market is still strong, it’s just much less strong than a year ago when job swapping for higher pay was easy,” said Robert Frick, Navy Federal Credit Union corporate economist.

-Terry Lane

Home Prices Keep Breaking Records Despite High Mortgage Rates

New data from December puts 2023 in the books as a weird one for the housing market, with home prices rising to new heights despite the highest mortgage rates in decades.

Average nationwide home prices rose 5.5% in 2023, according to the S&P CoreLogic Case-Shiller Home Price Index released Tuesday. For the month of December, prices rose 0.2% after seasonal adjustment, hitting a record high for the seventh month in a row, S&P Dow Jones Indices said.

The surge in home prices has gone hand-in-hand with soaring mortgage rates, a double-whammy hit to affordability that’s put home ownership out of reach for buyers with average incomes.

The Federal Reserve’s campaign of anti-inflation interest rate hikes throughout 2022 and 2023 pushed the average rate offered to a 30-year mortgage to nearly 8% this fall, its highest since 2000, and rates have stayed near 7% even after a downtick this winter, according to Freddie Mac.

In theory, high mortgage rates tend to push down home prices by reducing homebuying demand. But prices have continued to rise largely because of what housing economists have dubbed the “lock-in effect,” where many homeowners avoid putting their homes on the market because that would mean giving up an affordable fixed-rate mortgage they secured during the pandemic, when rates hit record lows.

Indeed, home prices rose more in 2023 than they do in a typical year, although far below the wild price spikes of the pandemic era when mortgage rates were ultra-low and housing was in high demand.

“While we are not experiencing the double-digit gains seen in the previous two years, above-trend growth should be well received considering the rising costs of financing home mortgages,” Brian D. Luke, head of commodities, real and digital assets at S&P Dow Jones Indices, wrote in a commentary. 

Led by Drop in Transportation, Durable Goods Orders Fall in January

Orders of items that don’t need to be purchased often, such as refrigerators, air conditioners, tools and computers  fell 6.1% in January.

It was a steeper drop than the 5% that economists were looking to see, according to a survey of economists by Dow Jones Newswires and the Wall Street Journal. The Census Bureau also revised its December results to reflect a slight drop in durable goods orders, marking declines in three of the past four months for the indicator of economic activity.

"While the U.S. economy has had a remarkably strong run so far, here’s at least one pocket of the economy showing signs of weakness," wrote BMO's Senior Economist Priscilla Thiagamoorthy.

However, that weakness may be overstated, according to Wells Fargo economists Shannon Seery Grein and Tim Quinlan.

"Transportation orders can be volatile month to month, which is why we often exclude them to get a clearer read of the current trend in demand, though they should not be completely ignored," the pair wrote. "When we consider the growth impact, transportation is a large part of the economy (accounting for about 33% of new orders), and it is factored into GDP estimates." The January decline was primarily spurred by a 16.2% drop in transportation equipment orders. Excluding transportation orders like aircraft, durable goods orders fell 0.3%.  

Capital goods orders, which include things like buildings, machinery and equipment used to produce items, fell nearly 20% in January.  The report also showed that shipments of durable goods were down for four of the past five months. 

-Terry Lane