by Calculated Risk on 2/27/2015 01:35:00 PM

A review of policy normalization by Fed Vice Chairman Stanley Fischer: Conducting Monetary Policy with a Large Balance Sheet (excerpt)

Turning to policy normalization, the FOMC and market participants anticipate that the federal funds rate will be raised sometime this year. We have for some years been considering ways to operate monetary policy with an elevated balance sheet.

Prior to the financial crisis, because reserve balances outstanding averaged only around $25 billion, relatively minor variations in the total amount of reserves supplied by the Desk could move the equilibrium federal funds rate up or down. With the nearly $3 trillion in excess reserves today, the traditional mechanism of adjustments in the quantity of reserve balances to achieve the desired level of the effective federal funds rate may well not be feasible or sufficiently predictable.

As discussed in the FOMC's statement on its Policy Normalization Principles and Plans, which was published following the September 2014 FOMC meeting, we will use the rate of interest paid on excess reserves (IOER) as our primary tool to move the federal funds rate into the target range.5 This action should encourage banks not to lend to any private counterparty at a rate lower than the rate they can earn on balances maintained at the Fed, which should put upward pressure on a range of short-term interest rates.

Because not all institutions have access to the IOER rate, we will also use an overnight reverse repurchase agreement (ON RRP) facility, as needed. In an ON RRP operation, eligible counterparties may invest funds with the Fed overnight at a given rate. The ON RRP counterparties include 106 money market funds, 22 broker-dealers, 24 depository institutions, and 12 government-sponsored enterprises, including several Federal Home Loan Banks, Fannie Mae, Freddie Mac, and Farmer Mac. This facility should encourage these institutions to be unwilling to lend to private counterparties in money markets at a rate below that offered on overnight reverse repos by the Fed. Indeed, testing to date suggests that ON RRP operations have generally been successful in establishing a soft floor for money market interest rates.6

The Fed could also employ other tools, such as term deposits issued through the Term Deposit Facility and term RRPs, to help drain reserves and put additional upward pressure on short-term interest rates. We have been testing these tools and believe they would help support money market rates, if needed.

Finally, with regard to balance sheet normalization, the FOMC has indicated that it does not anticipate sales of agency mortgage-backed securities, and that it plans to normalize the size of the balance sheet primarily by ceasing reinvestment of principal payments on its existing securities holdings when the time comes. As illustrated in figure 4, cumulative repayments of principal on our existing securities holdings from now through the end of 2025 are projected to be about $3.2 trillion. As a result, when the FOMC chooses to cease reinvestments, the size of the balance sheet will naturally decline, with a corresponding reduction in reserve balances.
emphasis added

by Calculated Risk on 2/27/2015 11:18:00 AM

Click on graph for larger image.

The final Reuters / University of Michigan consumer sentiment index for February was at 95.4, up from the preliminary reading of 93.6, and down from 98.1 in January.

This was above the consensus forecast of 94.0. Sentiment has been generally improving, and then surged last year at gasoline prices declined - and the economy improved.  The decline in February was probably related to higher gasoline prices.

Chicago PMI February 2015: Chicago Business Barometer At 5½-Year Low

The Chicago Business Barometer plunged 13.6 points to 45.8 in February, the lowest level since July 2009 and the first time in contraction since April 2013. The sharp fall in business activity in February came as Production, New Orders, Order Backlogs and Employment all suffered double digit losses, leaving them below the 50 level which separates contraction from expansion.

The West Coast port strike and the harsh winter probably had a negative impact in February, although it is difficult to gauge the magnitude.
emphasis added

This was well below the consensus forecast of 58.3.  This is just one month, and the decline could be related to special factors - such as the port strike - and we need to see what happens in March.

by Calculated Risk on 2/27/2015 10:05:00 AM

From the NAR: Pending Home Sales Rise in January to Highest Level in 18 Months

The Pending Home Sales Index, a forward-looking indicator based on contract signings, climbed 1.7 percent to 104.2 in January from an upwardly revised 102.5 in December and is now 8.4 percent above January 2014 (96.1). This marks the fifth consecutive month of year-over-year gains with each month accelerating the previous month's gain.
...
The PHSI in the Northeast inched 0.1 percent to 84.9 in January, and is now 6.9 percent above a year ago. In the Midwest the index decreased 0.7 percent to 99.3 in January, but is 4.2 percent above January 2014.

Pending home sales experienced the largest increase in the South, up 3.2 percent to an index of 121.9 in January (highest since April 2010) and are 9.7 percent above last January. The index in the West rose 2.2 percent in January to 96.4 and is 11.4 percent above a year ago.

Total existing-homes sales in 2015 are forecast to be around 5.26 million, an increase of 6.4 percent from 2014.

Note: Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in February and March. I'll take the "under" on the NAR forecast for 2015 sales!

by Calculated Risk on 2/27/2015 08:37:00 AM

From the BEA: Gross Domestic Product: Fourth Quarter 2014 (Second Estimate)

Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- increased at an annual rate of 2.2 percent in the fourth quarter of 2014, according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 5.0 percent.

The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 2.6 percent. With the second estimate for the fourth quarter, private inventory investment increased less than previously estimated, while nonresidential fixed investment increased more.

The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, exports, state and local government spending, private inventory investment, and residential fixed investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP growth in the fourth quarter primarily reflected an upturn in imports, a downturn in federal government spending, and decelerations in nonresidential fixed investment and in exports that were partly offset by an acceleration in PCE, an upturn in private inventory investment, and an acceleration in state and local government spending.

Here is a Comparison of Second and Advance Estimates.  PCE was revised down from 4.3% to 4.2% - still solid.  Overall about as expected.

by Calculated Risk on 2/26/2015 08:13:00 PM

The following important older post on inflation from Professor Krugman explains why I follow various measures of underlying inflation: Core Logic

[T]he idea of core inflation. Why do we need such a concept, and how should it be measured?

So: core inflation is usually measured by taking food and energy out of the price index; but there are alternative measures, like trimmed-mean and median inflation, which are getting increasing attention.
...
And people who say things like “That’s a stupid concept — people have to spend money on food and gas, so they should be in your inflation measures” are missing the point. Core inflation isn’t supposed to measure the cost of living, it’s supposed to measure something else: inflation inertia.

Think about it this way. Some prices in the economy fluctuate all the time in the face of supply and demand; food and fuel are the obvious examples. Many prices, however, don’t fluctuate this way — they’re set by oligopolistic firms, or negotiated in long-term contracts, so they’re only revised at intervals ranging from months to years. Many wages are set the same way.

The key thing about these less flexible prices — the insight that got Ned Phelps his Nobel — is that because they aren’t revised very often, they’re set with future inflation in mind. Suppose that I’m setting my price for the next year, and that I expect the overall level of prices — including things like the average price of competing goods — to rise 10 percent over the course of the year. Then I’m probably going to set my price about 5 percent higher than I would if I were only taking current conditions into account.

And that’s not the whole story: because temporarily fixed prices are only revised at intervals, their resets often involve catchup. ...

The standard measure tries to do this by excluding the obviously non-inertial prices: food and energy. But are they the whole story? Of course not ... Hence the growing preference among many economists for measures like medians and trimmed means, which exclude prices that move by a lot in any given month, presumably therefore isolating the prices that move sluggishly, which is what we want.
emphasis added

Friday:
• At 8:30 AM ET, Gross Domestic Product, 4th quarter 2014 (second estimate). The consensus is that real GDP increased 2.1% annualized in Q4, down from the advance estimate of 2.6%.

• Also at 9:45 AM, the Chicago Purchasing Managers Index for February. The consensus is for a reading of 58.3, down from 59.4 in January.

• At 10:00 AM: University of Michigan's Consumer sentiment index (final for February). The consensus is for a reading of 94.0, up from the preliminary reading of 93.6, but down from the December reading of 98.1.

• Also at 10:00 AM, the Pending Home Sales Index for January. The consensus is for a 2.0% increase in the index.

• At 1:30 PM: Speech, Fed Vice Chairman Stanley Fischer, Conducting Monetary Policy with a Large Balance Sheet, At the 2015 U.S. Monetary Policy Forum, New York, New York

by Calculated Risk on 2/26/2015 05:41:00 PM

Freddie Mac reported that the Single-Family serious delinquency rate declined in January to 1.86%, down from 1.88% in December. Freddie's rate is down from 2.34% in January 2014, and the rate in January was the lowest level since December 2008. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.

These are mortgage loans that are "three monthly payments or more past due or in foreclosure". 

Note: Fannie Mae will report their Single-Family Serious Delinquency rate for January next week.

Click on graph for larger image

Although the rate is generally declining, the "normal" serious delinquency rate is under 1%. 

The serious delinquency rate has fallen 0.48 percentage points over the last year - and the rate of improvement has slowed recently - but at that rate of improvement, the serious delinquency rate will not be below 1% until late 2016.

Note: Very few seriously delinquent loans cure with the owner making up back payments - most of the reduction in the serious delinquency rate is from foreclosures, short sales, and modifications. 

So even though distressed sales are declining, I expect an above normal level of Fannie and Freddie distressed sales for 2+ more years (mostly in judicial foreclosure states).

by Calculated Risk on 2/26/2015 02:58:00 PM

The automakers will report February vehicle sales on Tuesday, March 3rd. Sales in January were at 16.6 million on a seasonally adjusted annual rate basis (SAAR), and it appears sales in February will be about the same, and will probably be the best February since 2002.

Note:  There were 24 selling days in February, the same as last year.  Here are a couple of forecasts:

From J.D. Power: New-Vehicle Retail Sales in February Expected to Cross the Million Mark

New-vehicle retail sales in February 2015 are projected to reach 1,033,100 units, which is a 9 percent increase compared with February 2014 and the highest retail sales volume for the month as well as the first time that February retail sales are expected to exceed 1 million units since February 2002, when sales hit 1.1 million. ...

Total new light-vehicle sales in February 2015 are expected to reach 1.3 million units, a 9 percent increase, compared with February 2014, and match the recent high for the month set in February 2002. [16.7 million SAAR] Fleet volume in February is projected to hit 264,000 units, accounting for 20 percent of total sales.

New-vehicle sales in early 2015 are continuing the robust pattern from the fourth quarter of 2014. As a result, LMC Automotive is increasing its 2015 forecast for both retail and total light vehicles by approximately 40,000 units, each still rounding to 14.0 million and 17.0 million, respectively.

"Strength at the start of 2015 is a key factor in keeping the industry on target to surpass annual vehicle sales of 17 million units for the first time since 2001," said Jeff Schuster, senior vice president of forecasting at LMC Automotive.

And from TrueCar: TrueCar forecasts sustained U.S. auto sales expansion in February with 8.5% volume increase

TrueCar, Inc. ... projects the pace of February auto sales expanded to a seasonally adjusted annualized rate (SAAR) of 16.7 million new units on continued strong consumer demand.

New light vehicle sales, including fleet, should reach 1,295,600 units for the month, up 8.5 percent over a year ago. This same increase is expected on a daily selling rate (DSR) basis with 24 selling days this February versus a year ago.

"Strong February auto sales signal a very healthy U.S. economy," said Eric Lyman, vice president of industry insights for TrueCar. "Given this month's robust demand, the industry remains on track to hit TrueCar's 17 million-unit projection for the 2015."

Another strong month for auto sales.

by Calculated Risk on 2/26/2015 12:18:00 PM

The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (1.9% annualized rate) in January. The 16% trimmed-mean Consumer Price Index rose 0.1% (1.3% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers fell 0.7% (−7.8% annualized rate) in January. The CPI less food and energy rose 0.2% (2.2% annualized rate) on a seasonally adjusted basis.

Note: The Cleveland Fed has the median CPI details for January here. Motor fuel declined at a 92% annualized rate in January, following a 69% annualized rate decline in December, a 55% annualized rate decline in November, and a 31% annualized rate decline in October.  However motor fuel will add to inflation in February.

Click on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.2%, the trimmed-mean CPI rose 1.8%, and the CPI less food and energy rose 1.6%. Core PCE is for December and increased 1.3% year-over-year.

On a monthly basis, median CPI was at 1.9% annualized, trimmed-mean CPI was at 1.3% annualized, and core CPI was at 2.2% annualized.

On a year-over-year basis these measures suggest inflation remains below the Fed's target of 2% (median CPI is slightly above 2%).

The key question for the Fed is if these key measures will move back towards 2%.

by Calculated Risk on 2/26/2015 11:36:00 AM

From the Kansas City Fed: Tenth District Manufacturing Activity Rose Just Slightly

The Federal Reserve Bank of Kansas City released the February Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity rose just slightly from the previous month, but producers expected activity to pick up moderately in the months ahead.

“We saw a further slowing in growth this month, driven in part by weaker factory activity in our energy states”, said Wilkerson. “The raw materials prices index also fell for the first time in over five years.”

The month-over-month composite index was 1 in February, down from 3 in January and 8 in December. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. The overall slower growth was mostly attributable to large declines in primary metals and computer and electronics production. Looking across District states, the weakest activity was in Colorado, Oklahoma, and New Mexico. In contrast, production activity in the fabricated metals and machinery industries both increased moderately. ... the new orders index inched lower from 5 to 3, and the employment index fell for the second straight month.
emphasis added

We are seeing some impact from lower oil prices - however, overall, lower prices is a positive for the economy.

by Calculated Risk on 2/26/2015 08:30:00 AM

The DOL reported:

In the week ending February 21, the advance figure for seasonally adjusted initial claims was 313,000, an increase of 31,000 from the previous week's revised level. The previous week's level was revised down by 1,000 from 283,000 to 282,000. The 4-week moving average was 294,500, an increase of 11,500 from the previous week's revised average. The previous week's average was revised down by 250 from 283,250 to 283,000.

There were no special factors impacting this week's initial claims.

The previous week was revised down to 282,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.


The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 294,500.

This was above the consensus forecast of 290,000, and the low level of the 4-week average suggests few layoffs.