VANGUARD – Amid reports of reduced consumer prices and a spotty job market, the Federal Reserve’s upcoming policy meeting likely will grapple with the question: How long should the Fed stick with its easy monetary policy, including the ongoing purchase of billions of dollars worth of bonds and mortgage-backed securities?
While some Fed officials recently have suggested scaling back the program, this week’s reports may give the central bank some leeway to continue stimulating the sluggish U.S. economy by keeping interest rates low.
The Fed’s policymaking body, the Federal Open Market Committee, will begin its two-day meeting on April 30.
For the week ended April 19, 2013, the S&P 500 Index fell 2.1 percent to 1,555 (for a year-to-date total return—including price change plus dividends—of about 9.7 percent).
The yield on the 10-year U.S. Treasury note fell 2 basis points to 1.73 percent (for a year-to-date decrease of 5 basis points).
Consumer prices down
The cost of consumer goods dipped 0.2 percent in March, as a 4.4 percent drop in gasoline prices offset a slight gain in service costs. The decline of the Consumer Price Index followed February’s 0.7 percent increase. Core CPI, excluding food and energy, ticked up 0.1 percent.
Analysts said the 1.9 percent increase in core prices from March 2012 indicates the Federal Reserve’s policy isn’t causing any inflationary pressures that might force monetary tightening—at least not so far.
The Fed’s annual target rate of inflation is 2 percent, but has set 2.5 percent as an acceptable threshold to continue its current course to keep the economy out of recession and comfortably above deflationary conditions.
Analysts said the low inflation rate could enable the Federal Reserve to continue its $85 billion monthly bond-buying program. In addition to their inflation target, the Fed has linked the program to conditions in the labor market, which hasn’t produced the substantial improvement officials say they’re looking to see.
Housing starts go up the ladder
Construction of multifamily homes drove housing starts up 7 percent in March to its highest level since June, 2008. The seasonally adjusted annual rate was just under 1.04 million, as construction of homes with at least five units rose 31 percent. February’s figures were revised sharply upward to 968,000.
There were a few warning signs for the industry.
Construction of single-family homes dropped 4.8 percent and the number of new building permits fell almost 4 percent, which could indicate slower construction in the coming months.
Yet analysts are hoping the improvement in the housing market will support the economy, as home-related spending—including construction and renovations—has added to economic growth for seven straight quarters.
Industrial production rises
Industrial output rose a seasonally adjusted 0.4 percent in March as utility output surged 5.3 percent due to unseasonably cold weather—the largest monthly increase since early 2007.
Overall production for the first quarter was up at a 5 percent annualized rate, the best gain since the same quarter a year ago. Capacity utilization was up to a recovery high of 78.5 percent as previously unused assets have been put back to work.
Fed reports modest growth
A Federal Reserve report said new-home construction and auto manufacturing enabled the U.S. economy to grow at a moderate pace through early April.
The Federal Reserve Board’s “Beige Book,” a collection of insights from U.S. businesses and economists from across the Fed’s 12 districts, produced some contradictory positions: upbeat about the home, auto, and information technology sectors, while concerned about the soft job market, restrained consumer spending, and uneven manufacturing output.
Leading indicators slip
The index of leading indicators released by the Conference Board dipped 0.1 percent percent in March, down from an average 0.5 percent increase over the prior three months.
Weak consumer confidence and a drop in manufacturing and building permits contributed to the decline. Analysts said the 1.7 percent year-by-year improvement is less than the 2 percent figure posted for 2012, showing an economy still struggling to find its legs.
“Consumer confidence will be tested as the full impact of the sequester and payroll tax increases become clearer,” said Vanguard economist Andrew J. Patterson. “Weak consumer expectations would serve as a headwind for economic growth in the near term.”