FOMC Policy Statement – Fed is Optimistic about Labor Market Compared with View in January
The Fed left the federal funds rate unchanged as expected and maintained the key stance that "exceptionally low levels of the federal funds rate for an extended period" are warranted, given the subdued inflation trends, stable inflation expectations, and exceptionally low levels of the federal funds rate. President Hoenig of Federal Reserve Bank of Kansas dissented for the second time and was of the opinion that expectations of exceptionally low levels of the federal funds rate for an extended period could lead to excesses in the economy and increase the risk of instability.
The opening sentence of today's policy statement was more upbeat about labor market conditions as the Fed depicts labor market conditions as "stabilizing" compared with the description that "deterioration in the labor market is abating" in the January policy statement. The nature of the January and February employment reports published after the January 27 FOMC policy meeting allows this modification. The unemployment rate dropped to 9.7% in January and held at this level in February after a 10.0% reading in December. The pace of job losses has slowed significantly to an average loss of 31,000 jobs in the January-February period vs. a drop of nearly 90,000 jobs in the three months ended December and an average monthly decline of 261,000 jobs in the three months ended September. These headline numbers and other details of the latest two employment reports are positive. However, the broad measure of unemployment at 16.8% in February, over 10 million people collecting unemployment insurance for eleven straight weeks, and 40% of the officially unemployed remaining unemployed for 27 weeks and over are worrisome aspects of the labor market that justify a patient Fed. The Fed's views about economic growth and inflation were unchanged. Inflation expectations have, in fact, trended down after the January meeting (see chart 1).
Construction of New Homes - Standing Still, Will Activity Pickup Soon?
Starts of new homes fell 5.9% to an annual rate of 575,000 in February. Housing starts declined in Northeast (-9.6%) and South (-15.5%) but advanced in the West (+7.9%) and Midwest (+10.6%). Single-family starts declined slightly to an annual rate of 499,000 in February vs. 502,000 in January. On a 3-month moving average basis, starts of single-family homes are holding steady (see chart 2).
Single-family starts have risen nearly 40% from the record low reading of 357,000 posted in February 2009, but are down nearly 73% from the record high mark of 1.823 million units registered in January 2006 (see chart 3).
Permit extensions for multi-family homes fell 7.7% in February to an annual rate of 612,000, but were virtually unchanged for single-family units (502,000 vs. 503,000 in January). The key question is if construction of new homes will stage a strong rebound in the near term. The inventory of unsold new homes (see chart 4) and soft labor market conditions suggest a low probability of strong growth in home construction activity in the months ahead.
