Coronavirus Won’t Move the Fed
- Minutes from the January 28-29 FOMC meeting indicate the coronavirus will not push the Fed to cut interest rates, and for the most part housing and manufacturing survey data this week supported that view.
- The Leading Economic Index jumped 0.8% to an all-time high—easing some concerns generated by its dip into negative year-over-year territory the prior month—while the Philly Fed Index exceeded expectations by jumping to 36.7 and the Empire Manufacturing Survey beat consensus by rising to 12.9.
- Housing, meanwhile, continues to exceed expectations. December and January were the two strongest months for housing starts since 2006.
Coronavirus Won’t Move the Fed
Minutes from the January 28-29 FOMC meeting indicate the coronavirus will not push the Fed to cut interest rates. Positive housing and manufacturing survey data this week supported that view.
While trade tensions have receded markedly in recent months, the coronavirus has taken its place as the latest source of uncertainty plaguing businesses and investors. The outbreak has certainly worsened since the meeting—there are now around 76,000 cases in China, 208 in South Korea, 109 in Japan and 15 in the United States. The eight mentions of “coronavirus” in the minutes suggest the Fed, with its goal of sustaining the economic expansion top of mind, was closely monitoring even in late January. Despite the outbreak, the committee viewed the “distribution of risks to the outlook for economic activity as more favorable than at the previous meeting,” while also noting downside risks “remained prominent.” Its conclusion, however, that the virus has yet to cross the “material” threshold warranting a reassessment of the need for additional accommodation is disputed by the bond market. Market positioning now implies close to two cuts in the fed funds rate this year, while the 10-year to 3-month yield curve is inverted. Yet, markets can be fickle. We expect the Fed will remain on hold, a view which has been echoed by post-meeting Fed speakers, including Chair Powell during his congressional testimony last week.
Further supporting this view were the latest forward-looking indicators. The Leading Economic Index (LEI) jumped 0.8% to an all-time high—easing some concerns generated by its dip into negative year-over-year territory the prior month—while the Philly Fed Index exceeded expectations by jumping to 36.7 and the Empire Manufacturing Survey beat consensus by rising to 12.9. For more on the LEI, please see Topic of the Week.
Housing, meanwhile, continues to exceed expectations. Housing starts fell modestly in January, but only because of the incredibly high pace registered in December. Starts in both months were boosted by some of the warmest winter weather on record. Despite the fall, January’s pace was 21% above the total level of starts for 2019, meaning that if housing construction maintains its current pace, we will see some incredibly strong year-over-year numbers in 2020. As normal weather returns, and we expect to see payback this spring from December and January, which were the two strongest housing starts months since 2006. Still, the underlying trend remains very strong—low mortgage rates have improved buying conditions, and consumers increasingly report now is a good time to buy. Sensing this, builders have turned very optimistic, with the NAHB index, a measure of single-family homebuilder sentiment, hanging near a 20-year high in February. Existing home sales fell 1.3% in January, but are up nicely over the year.
The FOMC minutes also highlighted some long-term shifts in its thinking. The committee discussed maintaining an inflation target range, but “most” members had concerns that it could be misinterpreted as the Fed being comfortable with inflation below 2%. It plans to continue these deliberations at coming meetings as its part of its ongoing monetary policy review.