FOMC Minutes Underscore Fiscal Policy Uncertainty

Yesterday, the January 28-29 FOMC meeting minutes underscored the uncertainty plaguing the pathway back to price stability, including the unknowns resulting from adjustments in?fiscal policies. According to the minutes, a number of fiscal policies have "the potential to hinder the disinflation process, including the effects of potential changes in trade and immigration policy, as well as strong consumer demand,” particularly as a number of businesses indicated they "would attempt to pass on to consumers higher input costs arising from potential tariffs."

?

Of course, other fiscal policies were noted as a potential source of growth and optimism: “Many participants remarked that District contacts or surveys of businesses reported substantial optimism about the economic outlook, stemming in part from an expectation of an easing in government regulations or changes in tax policies.”

?

Thus, taken together, the FOMC minutes show most participants remain positive regarding recent inflation readings which?“had exhibited notable progress toward the Committee’s goal of price stability.” Nevertheless, most?generally concluded that?“upside risks” remain, including those stemming from?“trade and immigration policy” with “the potential for geopolitical developments to disrupt supply chains.”?

?

So what does this mean for policy? Well,?officials still appear to be generally encouraged by the broader pace of disinflationary improvement which prompted an earlier policy easing response in September. Now, however, the Fed’s position on the sideline will likely be exacerbated beyond January by the complication of distinguishing between?“relatively persistent changes in inflation and more temporary changes that might be associated with the introduction of new government policies.”?In other words, given the Fed’s upwards assessment of current conditions and downwards assessment of inflation improvement, the Committee appears increasingly willing to remain on the sidelines for a prolonged period of time, if warranted by the data. Taking a patient, wait and see approach, the Committee will continue to assess the evolution of conditions and the impact of fiscal policy before taking any additional action.?

?

Turning to the economic calendar, yesterday, housing market activity slowed more than expected at the start of the year, reflecting unfavorable weather conditions across much of the country ranging from wildfires in California to winter storms across the mid-Atlantic and Northeast. Housing starts fell 9.8% in January, surpassing the expected 7.3% decline and pulling the annual pace down from 1.52M to 1.37M, a two-month low.?

?

On a regional basis, starts fell in three of four regions of the country, declining 27.6% in the Northeast, 23.3% in the South, and 10.4% in the Midwest. Starts rose, however, 42.3% in the West at the start of the year.

?

Single family starts declined 8.4%, while multi-family starts dropped 13.5% in January following a 51.8% rise the month prior. Year-over-year, housing starts fell 0.7% in January, the fifth consecutive month of an annual decline.

?

Building permits, meanwhile, rose 0.1% in January, pulling the annual pace up slightly from 1.482M to 1.483M, a two-month high. According to the median forecast, permits were expected to fall 1.5% at the start of the year.

Single family permits were unchanged, while multi-family permits increased 0.2% in January following a 6.0% drop in December.

Year-over-year, building permits slipped 1.7% in January, marking a full year of an annual decline

?

Additionally, yesterday, MBA mortgage applications fell 6.6% in the week ending February 14 following a 2.3% rise the week prior. The 30-year mortgage rate, meanwhile, declined 2bps to 6.93%.

?

This morning, the latest read on jobless claims showed initial jobless claims rose 5k to 219k in the week ending February 15, slightly more than the expected increase to 215k and marking a two-week high. The four-week average, however, fell slightly from 216k to 215k. Continuing claims, or the total number of Americans claiming ongoing unemployment, meanwhile, increased by 24k from 1.85M to 1.87M in the week ending February 8, the highest in two weeks.

?

Also, this morning, the Philly Fed Business Outlook Index fell from 44.3 to 18.1 in February, less than the expected decline to a reading of 14.3, albeit marking a two-month low.

?

In the details of the report, new orders dropped from 42.9 to 21.9, shipments declined from 41.0 to 26.3, and the six-month outlook decreased to 27.8 from 46.3 in February, a five-month low. On the other hand, delivery time rose from 6.8 to 12.4 in February, the highest reading in six months and prices paid increased from 31.9 to 40.5 in February, the highest reading since October 2022.

?

Finally, this morning, the Leading Index fell 0.3% at the start of the year, surpassing the 0.1% decline expected and following an upwardly revised 0.1% gain in December (revised up from -0.1% initially reported). At -0.3%, this marks the largest monthly decrease since October.

?

Tomorrow, the S&P Global U.S. Manufacturing, Services, and Composite PMIs, the final February University of Michigan print, and January existing home sales reports will all be released.

?

-Lindsey Piegza, Ph.D., Chief Economist