The minutes of the Federal Reserve’s January Federal Open Market Committee meeting may clarify how much more “good data” the Fed’s policymakers want to see before starting to reduce interest rates. Chair Powell said at the press conference following the January decision that he saw a March cut as unlikely, but was uncharacteristically vague about exactly what the Fed’s preconditions for cuts are; this suggests FOMC members still disagree about the issue.
The minutes are also likely to shed light on the discussion planned for the March meeting about slowing the pace of the Fed’s balance sheet reduction.
The S&P Global PMIs likely rose in February after January’s severe weather ended. Existing home sales likely rose in January as lower mortgage rates at year-end spurred more purchases.
The Consumer Price Index (CPI) rose 0.3% in January from December and was 3.1% higher than a year earlier. Core CPI excluding food and energy rose by 0.4%, or 3.9% from a year ago. Headline and core CPI were both slightly above consensus estimates. The CPI’s energy index fell on sharply lower gasoline prices, but the report’s other details were discouraging.
Food consumed at restaurants rose sharply; shelter costs–accounting for a third of all consumer spending—rose a steep 0.6% and were 6.0% higher than a year earlier. Non-shelter services, including car insurance, physicians’ services, and haircuts, jumped by 0.6% and were up 3.6% from January 2023. The sharp rise in prices of non-shelter services is concerning as they account for around a fourth of all consumer expenditures.
The acceleration of prices of large, stickier components of the CPI basket, such as shelter and services, further diminishes the likelihood the Fed will cut rates in March. Following the hotter-than-expected CPI print, markets have pared back rate cut expectations for cuts in March and May, but still price in high odds that the Fed reduces its policy rate in June.
Sales at retail and food services establishments fell 0.8% in January, well below the consensus’ forecast for a 0.2% decline. The decline was broad-based, with nine of the thirteen subcategories down last month. Core retail sales, used in computing nominal household spending on goods in the GDP report, declined by 0.4% and undershot the consensus forecast for a 0.2% pullback. Severe weather, which affected large swathes of the country, very likely contributed to poor spending last month. The Fed will look through January’s weak retail sales figures in setting monetary policy.
Similarly, industrial production edged down 0.1% in January as manufacturing fell 0.5%, mining fell 2.3%, and utilities output surged 6.0% amid the bad weather. The NFIB Small Business Optimism Index fell by two points to 89.9 in January. The share of businesses reporting inflation as their foremost problem pulled back to the lowest since late 2021; it was still the most frequent response, though, with poor labor quality a close second. Noting difficulties filling vacancies, small business owners pared back hiring plans.
Bill Adams is a senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.
