As if on Cue, Data Weaken As Fed Meets

A2 | Wednesday, March 18, 2015
* * * *
As if on Cue,
Data Weaken
As Fed Meets
Federal Reserve Chairwoman
Janet Yellen, pointing to an improving labor market and other
signs of healthy economic
growth, has been carefully laying
the groundwork for raising interest rates later this year.
But a funny thing happened
on the way to so-called rate normalization: Some economic reports have stopped cooperating.
A slew of signals in recent
days—including industrial production, retail sales and housing
starts—point to sluggishness,
and have led private economists
to downgrade forecasts for firstquarter growth.
The downbeat shift in economic data complicates matters
for Fed policy makers, who have
been burned by faltering growth
several times during the recovery
and want to be convinced the
economy is sound before boosting interest rates. It also comes
as Fed policy makers gather on
Wednesday to decide whether to
begin considering interest-rate
increases later this year on a
meeting-by-meeting basis.
“It’s fairly evident that recent
data has been on the soft side,
certainly below expectations,”
said Tim Duy, an economics professor at the University of Oregon. “A weak first quarter is going to make it hard to meet the
Fed’s growth target for the year.”
Still, it isn’t clear how much of
the slowdown may result from
harsh winter weather and how
much from underlying weakness
in the economy. Additionally, the
economy has been buffeted by
other headwinds, including the
strengthening U.S. dollar, which
could crimp U.S. exporters by
making their goods more expensive, and the collapse in oil prices
that may be hurting U.S. energy
producers and related industries.
Fed officials will likely look
past the recent weakness for
now, said Roberto Perli, a former
monetary-policy economist at
the Fed, now with consulting
firm Cornerstone Macro, as
many of the causes of somewhat
weaker data could dissipate.
“There are many factors that
could be responsible for the recent spate of weakness, ranging
from inventories, to payback from
previous strength, to trade, to
weather,” Mr. Perli said. “I don’t
think there is a basis to infer that
recent weakness is permanent.”
Yet the trends are likely a cause
for concern among policy makers.
Retail sales have fallen for
three consecutive months. Sales
have been weak, even excluding
spending at gas stations, showing that consumers aren’t spending much of their savings from
lower fuel prices at other stores.
Industrial production barely
grew in February, after shrinking
in January and December. Manufacturing—the largest component of that index—has declined
for three months in a row.
Housing starts fell 17% in February from a month earlier,
though rough weather played
some factor and the data are notoriously volatile.
Private-sector economists have
whittled their expectations for
growth in recent weeks. The average estimate of economists in a
Wall Street Journal survey last
week called for growth of 2.3% in
the first quarter, down from 2.7%
in February and 3% in January.
Forecasts for the full year have
declined slightly, to 2.9% in
March from 3% in January.
Bloomberg News
Policy makers’ thinking
on raising interest rates
unlikely to change much
amid winter slowdown
Quits Amid
Fed Chairwoman Janet Yellen, shown in February, believes inflation will pick up when wage growth kicks in.
A Hazy Fade of Winter
While hiring trends have been strong for a while, other indicators of economic health have seemed sluggish
during the winter. The Fed is watching to see if the recent softness is a sign of trouble or a seasonal blip.
Monthly change in the
industrial production index
Monthly change in retail
and food services sales
Excludes gas stations
Monthly change in the personal
consumption expenditures
price index
In December, Fed policy makers forecast the economy would
grow 2.6% to 3% in 2015. They
will update those forecasts at
their meeting this week.
Most reassuring for Fed policy
makers is the continued strength
of the job market. The unemployment rate dropped to 5.5% in February, the lowest in nearly seven
years. The economy added 3.3 million jobs in the 12 months through
February, the most since 2000.
And while the Fed’s preferred
gauge of inflation has fallen for
three months and has been below the Fed’s 2% goal for inflation for 33 months, Ms. Yellen
and other Fed officials think inflation will move back up as
wage growth kicks in and energy
prices stabilize.
That could provide enough
support for the Fed to go ahead
and set the stage for rate increases. Officials said in January
State Backs Sweeping
Curbs on Water Use
The consequences of California’s
continuing drought deepened Tuesday, as state officials took the unprecedented step of mandating restrictions on outdoor watering to
help stretch scarce supplies.
Under restrictions adopted by
the State Water Resources Control
Board, outdoor irrigation of lawns
Dec. 12, 2012
The Fed expects to hold its rate
target near zero for ‘a considerable
time after’ a bond-buying stimulus
program ends and the recovery
March 18, 2009
The Fed starts
saying it expects
to hold its rate
target near zero
‘for an extended
The Fed drops
‘extended period,’
saying it expects
to hold rates low
‘at least through
March 20, 2014
Officials expect to hold the rate target
near zero ‘at least through mid-2015’
and expect to hold the rate very low
‘for a considerable time after the
economic recovery strengthens.’
The Fed cuts its
short-term interest
rate, the federal
funds rate, to zero
for the first time in
its history.
The Fed goes back to more
qualitative guidance and ‘will
assess progress toward its
objectives of maximum
employment and 2% inflation.’
Dec. 17, 2014
After ending its third bond-buying program in October, the Fed says
it will be ‘patient’ in raising interest rates—a word whose inclusion
was said to mean no rate increases for at least two meetings.
Sept. 21, 2011
Sept. 13, 2012
Dec. 16, 2008
Source: Labor Department (unemployment rate)
more volatility.
At the same time, however,
measures of short-term interest
rate and currency volatility have
picked up, a potential warning
sign of tumult to come. Merrill
Lynch’s MOVE index, which
tracks expected interest-rate volatility, has risen to levels seen in
2013, when the taper tantrum
Torsten Slok, chief international economist at Deutsche
Bank Securities, said this rate
volatility portends broader turbulence.
“The risk here is that when
volatility goes up in rates it will
be spilling over into other asset
classes,” he said.
Such turmoil could affect
other borrowing costs for U.S.
households and businesses, such
as rates on mortgages, credit
cards and corporate bonds. It
could also hit their stock portfo-
lios and 401(k) saving accounts.
A generation ago central
bankers prided themselves on silence and obscurity.
“I spend a substantial amount
of my time endeavoring to fend
off questions and worry terribly
I might end up being too clear,”
former Fed Chairman Alan
Greenspan joked in 1995.
But Mr. Greenspan began experimenting with interest-rate
guidance in 2003, when inflation
was low and the job market soft.
The Fed offered an assurance to
investors that short-term rates—
then 1%—would remain low for a
“considerable period.”
When the Fed started raising
rates in 2004, it kept reassuring
investors it would move them up
at a “measured pace” and proceeded to raise its benchmark
rate by a quarter percentage
point at 17 straight meetings.
Mr. Greenspan’s successor as
Fed chairman, Ben Bernanke, at
times moved more aggressively
than expected with short-term
rate cuts in 2008. He then adopted assurances they would
stay low, hoping such language
would hold down long-term interest rates to provide an added
boost to a damaged economy in
need of stimulus.
Now, as the economy improves,
Fed officials hope, the stimulative
boost from low-rate promises has
become less necessary.
Officials today see a fine line
between transparency and tying
their hands. Many believe the
Fed’s “measured pace” guidance
during 2004 to 2006 was a mistake, because it locked them in
to predictable rate changes and
betrayed their own uncertainty
about the outlook.
Fed officials now believe the
central bank needs to be able to
alter its pace of rate changes as
and other ornamental landscapes
would be limited to two days a
week in districts that don’t already
have limits. Such restrictions now
vary widely across California.
The agency voted to prohibit
lawn watering for 48 hours after a
storm, to require restaurants and
bars to serve water only on request, and to require hotels and
motels to offer guests the option
of not having linens washed daily.
Violation of the regulations, which
will take effect at the end of this
month, would be punishable by
fines of up to $500 an infraction.
Some large customers, including
golf course owners, said the limits
could prove counterproductive,
with overwatering on the days
when water use is allowed.
—Jim Carlton
he wanted to borrow the gun to
commit a robbery at the University
of Rhode Island. Authorities say the
gun was used to murder MIT officer Sean Collier on April 18, 2013,
days after the bombing, which
killed three people and wounded
more than 260. Mr. Tsarnaev has
pleaded not guilty to the charges.
—Jon Kamp
Dec. 2007 to Feb. 2015, seasonally adjusted
Witness Says He Gave
Tsarnaev a Handgun
A man who said he was close
friends with Dzhokhar Tsarnaev
testified Tuesday that he gave the
accused Boston Marathon bomber
a semiautomatic handgun that authorities say was later used to kill
a Massachusetts Institute of Technology police officer.
Stephen Silva pleaded guilty to
gun and drug charges last year in
a deal with federal prosecutors
that he said he hopes will lead to
reduced prison time in return for
his testimony against Mr. Tsarnaev.
Mr. Silva said he gave Mr. Tsarnaev a Ruger handgun with an
“obliterated” serial number in early
2013. He said Mr. Tsarnaev claimed
Presbyterians Approve
Same-Sex Marriage
The Presbyterian Church
(U.S.A.) approved redefining marriage in the church constitution
Tuesday to include a “commitment
between two people,” becoming
the largest Protestant group to
formally recognize gay marriage as
that they can be “patient in beginning to normalize the stance
of monetary policy.” Removing
the word “patient” from their
statement could be a signal that
the first rate increase could come
in June. By then, the recent weakness of the data could have faded.
“Even in years when the economy is booming, you’ll always
find pockets of weakness,” said
Joseph LaVorgna, the chief U.S.
economist for Deutsche Bank.
the economy evolves. “We’d probably not like to repeat a sequence
in which there was a measured
pace and [quarter-percentagepoint] moves at every meeting,”
Fed Chairwoman Janet Yellen
said in a December press conference. “I certainly don’t want to
encourage you to think that there
will be a repeat of that.”
Still, in practice, moving toward vaguer guidance about interest rates could be a challenge
for the Fed.
Even when officials have in
the past tried to move away
from telegraphing their actions,
they have found themselves
drawn back to behaving in highly
predictable ways.
In December, some Fed officials wanted to eliminate rate
guidance altogether. Instead, the
central bank made a nuanced
shift from an assurance rates
would stay low for a “considerable time” to an assurance of patience before rates rise.
Ms. Yellen said in December
the patience promise meant the
Fed was unlikely to raise rates at
its subsequent two meetings. If
the phrase appears in the statement Wednesday, it would rule
out a rate increase at the next
meetings in April and June. It is
likely to be dropped because several officials have said they want
to consider a June rate rise.
Jeremy Stein, a Harvard University economics professor and
former Fed governor, sees a conundrum brewing for officials.
Even if the central bank says its
actions will be less predictable,
the market will infer a rate path
from its actions.
To avoid unsettling markets,
he said, Fed officials have an incentive to stick to the path investors infer.
“It is a hard thing to manage.
You almost have to psyche yourself up to not worry too much
about spooking the bond market,” he said.
Christian and allow same-sex weddings in every congregation.
The new definition was endorsed last year by the church
General Assembly, but required approval from a majority of the denomination’s 171 regional districts.
After all regional bodies vote and
leaders officially accept the results,
the change will take effect June 21.
“So many families headed by
LGBTQ couples have been waiting
for decades to enter this space,”
said the Rev. Robin White, a leader
of More Light Presbyterians, which
advocates for gay acceptance
within the church. Carmen Fowler
LaBerge, president of the Presbyterian Lay Committee, said the
new definition was “an express repudiation of the Bible.”
—Associated Press
Jan. 25, 2012 The Fed’s rate target is likely
to stay near zero ‘at least through late 2014.’
Note: All data are seasonally adjusted.
Unemployment rate
Sources: Commerce Department and Federal Reserve (production index) via the Federal Reserve Bank of St. Louis
How the Federal Reserve’s policy statement has described expectations for interest rates, juxtaposed against the
unemployment rate, since they were cut to zero during the financial crisis.
Shifting Guidance
Continued from Page One
been using carefully chosen
words about the likely level and
direction of short-term rates as
policy tool, hoping promises
about the future will influence
other borrowing costs today,
such as the level of long-term
rates on mortgages or car loans.
The approach has become
particularly important since December 2008, when the Fed
pushed its benchmark federal
funds rate to zero amid the financial crisis and began promising it would stay there for an extended period.
With the labor market healing
and inflation expected to move
back toward their 2% target, Fed
officials hope they’re ready to
move on, at least rhetorically.
They see this as progress—before they believed the economy
was so weak they shouldn’t signal rate increases were anywhere on the horizon.
In addition to signaling that
the Fed expects to consider raising rates later this year, the
move away from a patience
promise is part of the central
bank’s broader effort to avoid
pinning itself down in the future.
Fed officials themselves are uncertain about when to start the
process of raising rates and want
flexibility to respond to new information about how the economy is evolving.
Right now measures of market volatility are sending divergent signals.
Stock-market volatility is relatively subdued.
The Chicago Board Options
Exchange’s stock volatility index,
for example, has averaged 17 this
year, above last year’s 14 but below its average of 21 between
2009 and 2014. The higher the
measure, known as the VIX, the
Excludes food and energy
Rep. Aaron Schock, an Illinois
Republican, said Tuesday he was
resigning from Congress after
questions arose about his campaign and office expenses.
Mr. Schock, 33 years old, has
been dogged by inquiries about
his spending of taxpayer and
campaign funds since the Washington Post reported last month
he had redecorated his Capitol
office to look like the set of television show “Downton Abbey.”
In a statement, Mr. Schock
said the questions “have proven
a great distraction that has
made it too difficult for me to
serve the people…with the high
standards that they deserve and
which I have set for myself.”
He initially brushed off questions about his redecorating,
telling ABC News, “haters are
gonna hate.” He didn’t respond
to email inquiries, voicemails or
texts Tuesday.
First elected to the House in
2008, Mr. Schock had been seen
as a GOP rising star. In 2013, he
weighed a run for Illinois governor but passed on the race after
a political-action committee allied with Bruce Rauner bought
advertising time in Mr. Schock’s
Peoria-based district that attacked him. Mr. Rauner, a Republican, was elected governor.
In recent weeks, news outlets
have written about spending by
Mr. Schock’s campaign apparatus
and his taxpayer-funded office.
The Office of Congressional Ethics began questioning his staff
and associates in recent days
about his office’s spending.
House Speaker John Boehner
(R., Ohio) said: “With this decision, Rep. Schock has put the
best interests of his constituents
and the House first.’’
Mr. Schock’s resignation, effective March 31, could draw a
host of candidates eager to represent his district, which is
heavily Republican. A potential
leading contender is state Sen.
Darin LaHood, son of former
Obama administration Transportation Secretary Ray LaHood.
The first name of singer Lesley Gore was misspelled as Leslie
in a Page One What’s News item
on Feb. 17.
Delphi Automotive PLC produced hundreds of documents
detailing communications between General Motors Co. and
its internal and outside lawyers
as part of the Melton family’s
litigation against GM. A Business News article Tuesday about
the case incorrectly said the
documents numbered in the millions.
Eastman Kodak Co. manufactures film for cameras and motion pictures. A Business News
article Saturday about Leica
Camera AG incorrectly said
Kodak had quit the film business
since going through bankruptcy
Woodford Reserve will be
the official bourbon of the Kentucky Derby this year, and the
Old Forester Mint Julep will be
the official drink of the event. A
Business News article Tuesday
incorrectly said Old Forester
would replace Woodford Reserve
as the official drink of the Kentucky Derby.
The restaurant Casper Fry is
in Spokane, Wash. A table with
an Off Duty article Saturday
about dining in smaller cities incorrectly said it is in Sacramento, Calif.
Readers can alert The Wall Street
Journal to any errors in news articles
by emailing [email protected] or by
calling 888-410-2667.
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