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The Fed: Dual Targets Or Dueling Targets?

The Federal Reserve has adopted an inflation target, as many other central banks have done long ago. However, the Fed retained its dual mandate, with a soft employment target. How will the two goals be achieved and what happens when they conflict? The Fed says is will use a balanced approach. The Fed lengthened the period for which it expects to keep short-term interest rates at exceptionally low levels (now, “at least through late 2014”). However, the five Fed governors and 12 district bank presidents have differing opinions on when the Fed should start raising short-term interest rates and what the appropriate level of the federal funds rate target will be at the end of 2014.

Atypical Weather Trims Consumer Spending and GDP in 2011:Q4

Real consumer spending slipped 0.1% in December after postings in October and November. All major components – durable goods (-0.1%), nondurables (-0.1%) and services (-0.1%) – fell in December and trimmed the pace of consumer spending in the fourth quarter. The weakness in consumer outlays on services stands out in the fourth quarter (see Chart 2). Service outlays rose only at an annual rate of 0.2%, while that of goods advanced 5.7%, reflecting a nearly 15% surge in purchases of durables and a 1.7% increase in expenditures on non-durables.

New Home Sales Dip, Orders of Durable Goods Advanced, Jobless Claims Rose

Sales of new single-family homes fell 2.2% to an annual rate of 307,000 in December, putting the annual average at 303,000 units. The tally of sales of new single-family homes in 2011 is the lowest on record (see Chart 1). On a quarterly basis, sales of new homes (see Chart 2) have been nearly flat for 2 years. The median price of a new single-family dropped to $210, 300, down sharply from a year ago. The inventory of unsold single-family homes at a 6.1-month supply mark is close to the historical average of 6.3-month supply. The absence of robust hiring and strict mortgage loan underwriting keep homes out of the reach of potential buyers.

January 24-25 FOMC Meeting – Fed Extends Low Rate Forecast to 2014

The latest forward guidance from the Fed is that exceptionally low levels of the federal funds rate will prevail at least through late 2014. There was one dissent, with President Lacker of the Richmond Federal Reserve preferring to eliminate the description of the time period over which the federal funds rate would be left unchanged. The Fed changed its expectation about tightening to late-2014 from mid-2013 which has been in place since August 2011.

Checklist for the January 24-25 FOMC Meeting - Continued

Yesterday's edition of the daily commentary listed three changes the Fed will incorporate in the manner in which it communicates with financial markets as of January 25. We had noted that additional comments about the Fed's balance sheet will be the topic of today's discussion. Picking up from yesterday's note, the Fed has indicated that the narrative will include "qualitative information" about the outlook for the Fed's balance sheet. The market consensus is that these details will be part of the minutes to be published on February 15. It is also likely that Chairman Bernanke would answer questions about this issue during the press conference. In any case, some background about the Fed's balance sheet is called for now.

The Inflation Outlook

The Consumer Price Index rose 3.0% in 2011 (December-to-December), twice the rate of 2010. A big part of that increase was food and energy prices, which picked up in the first half of the year. Ex-food & energy, the CPI rose 2.2%, not especially high. The shorter-term trend in the CPI is benign. The overall CPI fell at a 0.4% annual rate in the final three months of the year, while the core rose at a 1.8% pace. Economists tend to focus on core inflation because we’re interested in the underlying trend – not because food and energy prices don’t matter.

Checklist for the January 24-25 FOMC Meeting

The Fed's January 24-25 FOM C meeting will mark the introduction of three changes to the Fed's communication strategy. The Fed will present its own forecast of the federal funds rate for the period 2012-2016. The Fed published a template last week illustrating what the forecast will look like when it is published on Wednesday, January 25. Using the Fed's templates, this is an example of how the two new charts would look like, which are additions to the current "Summary of Economic Projections." Please be advised that Charts 1 and 2 are NOT the Fed's forecast but only a mock-up adapted from the Financial Times. First, the Fed will publish one chart (see Chart 1) indicating the views of participants about when they expect to raise the federal funds rate. For example, Chart 1 shows that 10 members expect to increase the target federal funds rate in 2014.

Sales of Existing Homes: Slow Growth, Moderation of Price Declines is Visible

Sales of existing homes rose 4.6% to an annual rate 4.61 million units in December, which takes the annual sales to 4.293 million units. Sales numbers of 2009 and early part of 2010 reflect the impact of the first-time home buyer program. The cycle low for sales of existing homes excluding the swings related to the first-time home buyer program was 3.77 million units for all homes and 3.39 million units for single-family, which occurred in November 2008. With reference to this benchmark, sales of existing single-family homes have moved up 21% in roughly three years.

Consumer Price Index, Jobless Claims, Housing Starts – Each of These Reports Have Favorable Aspects to Note

The Consumer Price Index (CPI) held steady in December, after posting a similar reading in November. The energy price index inched down 1.3% in December, marking the third consecutive decline. The recent increase in oil prices should be reflected in the January CPI report. The food price index increased 0.2% in December putting the year-to-year gain at 4.7% vs. 1.5% in all of 2010. The energy price index moved up 6.6% in 2011 compared with a 7.7% jump in 2010. The 3.0% increase in the overall CPI in 2011 reflects these gains as well as an acceleration of the core CPI, which excludes food and energy.

Economic Reports Underscore More Positives of the U.S. Economy

Today’s economic reports present a bullish picture of the U.S economy. Industrial production in December was strong and optimism of homebuilders improved in January, while wholesale prices fell. Industrial production rose 0.4% in December after declining 0.3% during November. The 0.9% jump in factory production, which accounts for the bulk of total industrial production, stands out in today’s report after a 0.4% drop in November.

Fed Policy Outlook – More Communication Is Good

The Federal Open Market meets next week to set monetary policy. It’s widely expected that short-term interest rates will remain unchanged and that (for the time being) there won’t be another round of asset purchases (QE3). The Fed will begin publishing the range of senior Fed officials’ projections of the appropriate federal funds rate target (for the fourth quarter of this year and the next few years). There are more benefits than risks in making these projections public.

Oil Prices - Another Roller Coaster Ride in 2012?

Oil is trading around $112 a barrel this morning. Putting things in perspective, the price of oil today is higher than the level seen in the 2005-2006 period when the world economy was growing at a faster pace and the economic challenges of 2012 were not on the horizon.

Declining Trend of US Exports Warrants Close Watching

The trade deficit of the U.S. widened to $47.75 billion in November from $43.27 billion in the prior month. Nominal exports of goods and services have dropped for two consecutive months, while exports of goods adjusted for fell 1.5% in November after posting gains in each of the two prior months. Imports of goods and services also advanced in November. The October-November data imply that a widening of the trade deficit in the fourth quarter is a negative for GDP growth.

U.S. Retail Sales – Strong Q4, But Underlying Momentum is Slowing

Retail sales rose only 0.1% in December, after a 0.4% jump in November. The strong performance of retail sales in November and December has given a lift to total retail sales in the fourth quarter. It is nearly certain that consumer spending in the fourth quarter (+2.5%, forecast) will exceed that of the third quarter (+1.7%).

Tracking China’s Imports and Germany’s Exports

Imports of China slowed to a 10.7% year-over-year growth in December 2011 (see Chart 1), the smallest increase since late-2009. Imports of China from Germany, the driver of economic growth in Europe, have posted a significant slowing, with the December increase amounting a paltry 4.2%, the smallest gain since October 2009.

Outlook of Small Businesses Improves, But Still Short of Levels Seen in Good Economic Times

The Small Business Optimism Index moved up to 93.8 during December from 92 in the prior month. The improvement is noteworthy and it is the highest since February 2011. However, the level of the index is within the range seen during the recession (see Chart 1).

Steady As She Goes Into Early 2012

Recent data reports have been consistent with an improving economy, but are not suggesting that overall growth is particularly strong. Nonfarm payrolls picked up in December, but seasonal adjustment makes it hard to tell how much of that is real. The unemployment rate has fallen significantly over the last two years, but details suggest that job growth has been slightly beyond what’s needed to absorb the growth in the working-age population – only a bit better than “running in place” or “treading water.” Still, that’s something to build on.

Update on Headwinds That Could Rock the U.S Economy

The key question about the growth trajectory of the U.S. economy for 2012 is if domestic economic momentum that is visible in bullish economic reports of past – ISM factory survey data, Q4 auto sales, and December employment report – will prevail in the rest of 2012 and offset headwinds from Europe (and its associated ramifications) and the setback from a decelerating trend of business activity in China. In the context, we will be providing periodic updates as economic reports are published.

December Employment Situation – Widespread Gains in Hiring Allows Fed to Watch from the Sidelines

Civilian Unemployment Rate: 8.5% in December, down from 8.7% in November. Cycle high jobless rate for the recent recession is 10.0% in October 2009. Payroll Employment: +200,000 jobs in December vs. +100,000 in November. Private sector jobs increased 212,000 after a gain of 120,000 in November. A net loss of 8,000 jobs followed after revisions to payroll estimates of October and November.

Labor Market – Encouraging Signs, December Employment Report Awaited

Initial jobless claims fell 15,000 to 372,000 during the week ended December 31. The four-week moving average at 373,250 is the lowest since June 2008. Continuing claims, which lag initial jobless claims by one week, dropped 22,000 to 3.595 million. As of December 31, 2011 initial jobless claims stood at 372,000 vs. 418,000 a year ago. Initial jobless claims averaged 409,000 in 2011, the lowest since 2007 and they are comparable to the level seen in 2001-2003 and marginally lower than the 2008 mark (see Chart 2). Continuing claims, which lag initial claims by one week, remain at an elevated level of 3.747 million.

The Fed’s New Communication Strategy – Aspects to Ponder About

The Fed’s new communication strategy of announcing the expected path of the Fed funds rate has not resulted in a radical transformation of the Fed funds market as yet. The July 2014 Fed funds futures contract, albeit thinly traded, implies a 0.50% Fed funds rate only by mid-2014, while the 2-year Treasury note yield hovers around 0.25% (see Chart 1). The Fed’s forecast will be published on January 25, 2012.

Minutes of December 2011 FOMC Meeting - Fed Will Publish Forecast of Fed Funds Rate

The highlight of the minutes of the December 13 FOMC meeting is that the Fed plans to publish its forecast of the path of the federal funds rate. The Fed will include in its economic projection the federal funds rate for the fourth quarter of 2012 and “next few calendar years.” The likely timing of the first increase in the fed funds rate will also be available as part of the January 24-25, 2012 projections. The Fed’s communiqué in January will include explanations of the “key factors underlying those assessments as well as qualitative information regarding participants’ expectations for the Fed’s balance sheet.”

Will an Extension of the Payroll Tax “Holiday” Turn Out to Be a Festivus Miracle for GDP?

In recent days many economists were preparing to lower their 2012 GDP forecasts in case Congress could not reach an agreement to extend the 2% reduction in the employee contribution to the payroll (FICA) tax. I kept getting questions on how much I was going to lower my forecast if the tax holiday were not extended. And I kept responding, 0.0%. Why was I not going to change my forecast when the best and the brightest were estimating that a failure to extend the payroll tax holiday would knock anywhere from 50 to 100 basis points of 2012 GDP? For several reasons.

Should the Definition of the Central Bank Lender of Last Resort Function Be Expanded?

A fractional-reserve banking system is susceptible to bouts of liquidity stringencies that, if left unchecked, can result in serial bank failures and an abrupt contraction in bank credit. The sine qua non of central banking is to act as a lender of last resort to otherwise solvent but temporarily illiquid banks so as to prevent their temporary illiquidity from deteriorating into insolvency, which would result in the aforementioned contraction in bank credit.

Exxon Mobil (NYSE:XOM) – Increase In Hybrid Automobiles Forecasted

Exxon Mobil forecasted that by 2040, 50% of vehicles will be running on hybrids or other alternative fuel. Hybrids, which depend on both electricity as well as gas for power presently comprise below 1 percent of all vehicles.

AT&T (NYSE:T) Acquisition Of T-Mobile Falls Down On Regulation

AT&T bowed down to tough regulatory opposition in its bid of $39 billion for Deutsche Telekom's U.S. wireless entity. The company will need to search another method in order to meet its requirements of wireless airwaves whereas Deutsche Telekom will have to find another buyer for T-Mobile USA.

Some Questions For 2012 And Beyond

The U.S. economy is expected to advance at a moderate rate in 2012, but Europe presents a key downside risk to the outlook. That aside, there are longer-term uncertainties about potential growth over the next several years. Next year will be an election year and income inequality could be an issue. Like any good horror movie, the European crisis has carried an ongoing feeling of dread. The potential for a catastrophic collapse is palpable. For the U.S., a meltdown would hit exports, but the bigger fear is possible financial market disruptions.

How Important is North Korea's Leadership Change?

This weekend, North Korean officials announced the passing of Supreme Leader Kim Jong-il, supposedly from a heart attack. Not too surprisingly, the next day Pyongyang heralded Kim's youngest son, Kim Jong-un, as the new head of state along with the title of "Great Successor." While it is widely known that the elder Kim was in poor health and rushing the grooming process for his son's succession, the Supreme Leader's sudden death leaves plenty of reasons to speculate as to just how the transition will impact North Korea and its relations with the world.

Inflation – A Hurdle for the Next Round of Quantitative Easing?

The Consumer Price Index (CPI) held steady in November after a 0.1% drop in October. The 1.6% drop in the energy price index and the muted 0.1% increase in food prices helped to hold down the overall gain of the CPI in November. Gasoline prices continue to decline and offset higher prices of heating oil. The core CPI, which excludes food and energy, rose 0.2% in November following gains of 0.1% in each of the prior two months. Higher prices for apparel (+0.6%) and medical care (+0.4%) show the relatively large gains in November. Shelter costs advanced 0.2% in November, matching the increase seen in October.

US Car Exports To China Incurr A Heavy Tax

During 2009, President Barack Obama struck a blow to Chinese tire manufacturers by a trade tariff. China has responded back with a hefty tax increase of as much as 21% on cars exported from U.S. to China, the world’s biggest automobile market.

RIM (NASDAQ:RIMM) Continues to Stumble, No New Blackberrys until Late 2012

Research in Motion (NASDAQ: RIMM) told analysts on Thursday that it expected lower sales and profit for the 4th quarter than anticipated.  The company’s stock, already close to comatose after a year to forget, dropped nearly 8% on the news in after-hours trading taking it as low as $13.94 per share.

G7 Government Debt – Facts and Projections

The possibility of Standard &Poors downgrading France’s triple A debt rating is the latest source of market anxiety among several other factors. Standard &Poors put 14 eurozone countries on negative watch earlier in the month. Today, Christian Noyer, the head of the central bank of France, expressed strong reservations about ratings agencies. It is helpful in this context to look at recent trends of government debt as a percent of GDP of major advanced nations. Facts and projections of government debt as a percent of GDP are made available by the International Monetary Fund.

Asia: Diverging Outlooks Going Into 2012

With most of the industrialized world focusing on all things European, we thought it might be worthwhile to see just what was happening on the other side of the Ural Mountains. Asia has not become embroiled in the debt problems sweeping through the likes of Greece and Italy, and its exposure to the euro is contained. However, what happens in Europe will inevitably drift into Asia, so a look at its major economies might provide insight into what awaits the region in 2012. In particular, we are focusing on the two most populous countries in the world – China and India.

Intel: A Shortage Of Hard Drives Hits Company Sales

Intel Corp, the latest giant in the PC industry notified that hard-disk drive shortage due to recent flooding in Thailand might affect adversely it current quarter income.

Intel Guides Lower on HD Shortage

Microprocessor giant Intel Corp. (NASDAQ: INTC) opened the week by letting the market know that the flooding in Thailand is reaching their business as well.  The expected shortage of hard drives will impact the company’s 4th quarter revenue even in the face of strong PC sales.   Intel guided their revenue down to a range of $13.4 to $14.0 billion compared to their original estimates of $14.2 – $15.2 billion.

Current Week Shines with Launch of Several IPOs

This sure is a very important week for the US stock markets as eleven highly anticipated initial public offerings are to hit the markets. Zynga is expected to launch its IPO which sure has big name in social networking and media industry.

Dow Jones Companies with Strongest Short Term Liquidity

Fed Stands Pat as the Curtain Closes on 2011

The Fed upgraded the performance of the U.S. economy compared with its assessment in November. The FOMC vote to stand pat was nearly unanimous, with only one dissent. Chicago Fed President Evans dissented as he would have preferred additional policy accommodation. The economy is now seen to be growing at a moderate pace despite the slowing conditions abroad. The Fed noted that while there are "some improvements in the labor market," the "unemployment rate remains elevated."

Fed Policy Outlook – Changes On The Way?

The Federal Open Market Committee will meet on Tuesday to set monetary policy. The Fed is widely expected to leave short-term interest rates unchanged and the wording of the economic assessment should be largely the same as in the previous statement. However, we could see another round of asset purchases or some changes to the Fed’s communications. The inflation outlook is moderate. It doesn’t look like we’ll see substantially higher inflation in 2012, but (barring a large negative shock to growth) we’re unlikely to see a threat of deflation.

The Other Side of the Austerity Program - German Economy Stands to Lose

A fiscal austerity program has been adopted as the cure all for the ills of the indebted members of the eurozone. The flipside of this policy is that in the short-run Germany’s exports of goods and services will take a deep hit. Exports of goods and services from Germany reached a record high of 51% in the third quarter of 2011 (see Chart 1). A large part of these exports are intra-regional exports, implying that projected setbacks to economic growth in countries implementing fiscal austerity measures would work adversely for German economic growth in the near term. Real GDP growth in Germany has slowed to 2.0% in the third quarter following a 3.3% pace in the first six months of the year.