- The dollar and U.S. Treasury yields crept higher along with world shares on Wednesday, as markets braced for what was expected to be a very close call on the future of the Federal Reserve’s massive stimulus program
- U.S. consumer price index unchanged in November from October on falling energy costs
- Absence of inflationary pressure could persuade the Fed to leave stimulus in place
The Federal Reserve’s decision on whether to scale back its monthly asset purchases Wednesday could come down to inflation – or more to the point, the lack of it.
Officials at the U.S. central bank opted against curbing their $85-billion-a-month (U.S.) program of quantitative easing this fall for three reasons: they were wary that stronger economic data was too good to be true, they were afraid politicians would continue to budget by crisis, and they were troubled that inflation was stuck well below the Fed’s target of 2 per cent.
Two of those concerns have abated. For the most part, economic indicators have continued a trend of better-than-expected readings. The latest came Tuesday, when a gauge of home builders’ confidence matched its highest level in eight years in December. The Fed’s policy committee will likely be raising its economic outlook, as recent measures of hiring, retail sales and industrial production show the U.S. economy is gaining momentum.
Economic growth is picking up as a significant headwind recedes. In October, the U.S. Congress allowed the federal government to close for almost three weeks in a partisan spat over spending priorities. The episode shook business confidence and left lawmakers deeply unpopular with the voting public. Part of the resolution of the shutdown was a commitment by the Democratic negotiators from the Senate and Republicans negotiators from the House of Representatives to agree on a longer-term fiscal plan. There was little confidence they would do so.
Congress proved the cynics wrong. The U.S. Senate voted 67-33 on Tuesday to end debate on the two-year budget agreement that passed the House of Representatives last week, clearing the way for passage of Washington’s first budget in four years. Senate Majority Leader Harry Reid needed 60 votes to avoid filibuster, and controlled 55 in his Democratic caucus. While it was widely expected that Mr. Reid would get to 60, 12 Republican votes is a much greater outcome than most had predicted.
The budget reverses a portion of spending cuts planned for the next two years, suggesting the federal government will be less of a drag on economic growth than it was in 2013, when austerity measures subtracted heavily from gross domestic product. Combined with evidence that the private sector is gathering pace, Washington’s fiscal peace argues for the Fed to begin the long road back from its extraordinary stimulus efforts.
Yet that is less than assured. The reason is inflation. The disinflationary trend that is troubling some countries, including Canada, is a less acute in the United States. But price measures remain well below the Fed’s goal, giving policy makers reason to leave policy unchanged.
“It’s a close call,” said Sébastien Lavoie, a former Canadian central banker who is now assistant chief economist at Laurentian Bank Securities in Montreal. “Both options are explainable.”
The Labor Department reported Tuesday that its consumer price index was unchanged in November from October, and that the annual rate was 1.2 per cent – only a little more than half the Fed’s target.
Fed officials are openly concerned about the weak inflation readings. Depressed prices heighten the risk of future deflation, an entrenched downward drift of prices that saps economies of forward momentum.
The annual rate in November was faster than the 1-per-cent rate posted in October.
American energy prices plunged in November, offsetting increases for many other consumer staples. Gasoline prices were 5.8 per cent lower last month than a year earlier, and the cost of natural gas posted a similarly sharp decline.
With energy and food prices removed from the index, prices rose 0.2 per cent on the month and 1.7 per cent on the year. The cost of services put upward pressure on inflation, gaining more than 2 per cent from November, 2012. Home prices and rents, a major component of the index, rose 2.4 per cent. Automobile prices also posted significant increases.
Polls of Wall Street analysts suggest most still think the Fed will wait until next year to curb its asset-purchase program. But that consensus has gotten progressively shakier. Mr. Lavoie said in a note Tuesday that a “very mild” taper would be “justifiable.”