Federal Reserve's Daly: Affordable Housing Shortage Effects Widespread

The shortage of affordable housing in the U.S. now affects more people than at any other time in living history, San Francisco Fed President Mary C. Daly said today.  Daly pointed to research showing the typical home was now valued at more than three times the median family’s income, almost double what it was in 1960. “While the affordability gap has been accumulating for 50 years, it’s widened considerably in the past 20,” Daily told the National Interagency Community Reinvestment Conference in Oregon on Wednesday.  While several factors are contributing to higher housing costs, Daly pointed to the limited supply of housing being the root of the problem. Fewer homes for sale not only drive up prices for home buyers but also raise costs for renters. Plus, affordable housing is causing issues with businesses, which are losing employees because they aren’t able to afford housing close to their places of work. Daly pointed to a host of efforts by states and communities to address the issue, including utilizing the Community Reinvestment Act, which helps fund low- and moderate-income communities, as well as changing zoning and development laws in some places to encourage more development. Ultimately, however, the best tool for the Federal Reserve to make housing more affordable is to lower interest rates by getting inflation under control, Daly said.  “History has taught us that price stability is the single best mechanism to ensure sustainable growth,” Daly said. “Without this condition, the economy, the labor market, and the housing market all falter.”

-Terry Lane

'Beige Book' Paints a Portrait Of An Economy Chugging Slower Than Before

Inflation has lost some momentum since early January, but so too has the job market and the economy overall, a compilation of anecdotal reports from around the country suggests.

This view of the economy comes from the Beige Book, a scattershot sampling of reports from business owners, experts, and community leaders around the country gathered by the Federal Reserve and released Wednesday.

The Beige Book is just one bit of information Fed officials will consider when they meet March 19 and 20 to decide whether inflation has subsided enough for them to cut the Fed’s benchmark interest rate. Interest rates have been putting pressure on borrowing costs for all kinds of loans and cutting them would begin to unwind the two-year-old campaign of anti-inflation interest rate hikes.

Markets currently are pricing in a 54.8% chance the first rate cut will come in June, according to the CME Group’s FedWatch tool, which forecasts fed rate movements based on fed funds futures trading data. That impression was solidified by Federal Reserve Chair Jerome Powell’s testimony before Congress earlier Wednesday. The latest report did little to change that expectation.

“The Fed's regional report card suggests the economy has lost a step but continues to move forward, while inflation pressures continue to ease gradually,” Sal Guatieri, senior economist at BMO Capital Markets, wrote in a commentary. ”The report is far from the complete evidence that the Fed will need to ease policy, but it fits with Chair Powell's current timeline to cut rates ‘this year.’” 

Overall economic activity in the U.S. “increased slightly” while consumer spending “inched down” amid reports that customers are trading down and buying less expensive things as well as shifting their spending from wants to needs, the report said.

Powell: Banking Issues Related to Commercial Real Estate May Linger For Years

In his congressional testimony, Powell addressed concerns over regional banks getting in trouble with commercial real estate loans. He said his team has been in touch with institutions to make sure that they are prepared for inevitable losses.

"It's going to be with us as a problem we'll be working through I think for several years," Powell said. "The idea is you've got to have enough capital, enough liquidity and a plan to take the losses that you're probably going to take." Banks with large portfolios of commercial real estate loans are encountering issues as property owners struggle to lease office space and in turn, pay down their debt. Work-from-home policies that became popular after pandemic-related stay-at-home measures were implemented in 2020 have left many spaces vacant. "We have been engaged with medium- and small-sized banks principally on this. So I am confident that we're doing the right things there. And I do believe it's a manageable problem. If that changes, you know, then I'll say so."

-Christiana Sciaudone

Wholesale Inventories Fall Faster Than Expected

Warehouse merchandise fell lower than expected in January, according to a report from the Census Bureau Wednesday.

Wholesale inventories came in at $895.1 billion, a 0.3% drop from December Economists were anticipating a more mild 0.1% drop in total warehouse inventories, and the larger decline could be a signal that consumers are pushing the brakes on their recent spending habits. 

Lumber saw the steepest drop, with inventories declining 7.5% from December, while warehouses also stocked less metals, furniture and farm products in January. Inventories for automotive parts, apparel and groceries all expanded during the first month of 2024. The inventory-to-sales ratio, which helps show how quickly wholesalers can sell their products, came in at 1.36 in January, down slightly when compared with a year ago.

-Terry Lane

Job Openings In Holding Pattern In January

Workers maintained their upper hand in the job market in January, as the number of job openings stayed at an elevated level, the Bureau of Labor Statistics said Wednesday.

There were 8.9 million job openings in January, relatively the same as in December, meaning there were 1.4 job openings for every unemployed worker, also unchanged from the previous month. Although fewer than the 2-1 ratio workers enjoyed in March 2022, it was still more than the 1.2 jobs that every unemployed worker had to choose from before the pandemic hit.

Employers laid off 1.6 million workers, little changed from December, and near a historic low.

Overall, the report showed a job market staying resilient in January. Economists are closely watching the labor market for signs that employers are pulling back on hiring because the Federal Reserve maintaining high interest rates to quash inflation. Those interest rates have made it costlier for businesses to borrow money to pay their workers.

On Friday, a bureau report on February’s job data is expected to show a slight slowdown from January.

Fed Chair Powell Says Rate Cuts This Year Are Likely But Not Assured

The Federal Reserve is likely to cut its benchmark interest rate later this year as inflation continues to recede, but that’s not a guarantee, Federal Reserve chair Jerome Powell will tell Congress this morning. 

Powell, who is set to testify before the House of Representatives Committee on Financial Services today, submitted prepared remarks that repeat the themes of the most recent communications by officials at the central bank.

Inflation has fallen enough from its mid-2022 peak that the Fed is now weighing when to begin rolling back its campaign of anti-inflation rate hikes, but that they reserve the right to delay rate cuts or even hike rates again if inflation flares up again. “We believe that our policy rate is likely at its peak for this tightening cycle,” Powell said in his prepared remarks. “If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year. But the economic outlook is uncertain, and ongoing progress toward our 2% inflation objective is not assured. Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to 2%.”

Despite the note of caution, Powell said he was encouraged that inflation has fallen significantly toward the Fed’s goal of a 2% annual rate without causing a recession and mass unemployment, as many economists had feared last year.

Private Sector Jobs Come in Below Estimates, Wages Growth Continues

Private sector jobs grew more in February than in January, but the 140,000 new positions added in the ADP Employment Report came in below the 150,000 that economists were expecting to see. 

The report also showed that pay continued to rise faster than the rate of inflation, with annual wages rising 5.1% year-over-year, compared to an inflation rate below 3%. It’s the smallest gain in wages since August 2021. 

Meanwhile, pay for job changers in February jumped to 7.6% when compared with last year, above the 7.2% pay bump job changers got in January, accelerating for the first time in more than a year.  Economists are closely watching data wages for signs of softening that would lessen changes of reaccelerating inflation and set the Federal Reserve up to begin cutting interest rates later this year. “Job gains remain solid. Pay gains are trending lower but are still above inflation,” said Nela Richardson, ADP chief economist. “In short, the labor market is dynamic, but doesn't tip the scales in terms of a Fed rate decision this year.” 

The private payroll report comes ahead of the February job report on Friday from the U.S. Labor Department, where economists are forecasting that the unemployment rate will remain at 3.7%. 

-Terry Lane