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Mid-Week Update - March 17, 2010

The Federal Open Market Committee voted on Tuesday to maintain the fed funds target rate at near-zero, where it has been since December 2008. While the decision to maintain the target rate was unanimous, the inclusion in the statement of the committee's intention to keep rates there "for an extended period" was not. Kansas City Federal Reserve President Thomas Hoenig dissented as he believed that maintaining ultra-low rates for much longer could lead to a "buildup of financial imbalances and increase risk to longer-run macroeconomic and financial stability." The FOMC reaffirmed, once more, its plan to wind down the Fed's purchases of mortgage-backed securities by the end of March as well as closing down other special liquidity facilities that have supported financial markets over the past year and a half. The remaining program--the Term Asset-Backed Securities Loan Facility--is scheduled to shut down by the end of June.

The FOMC statement, which had noted that "substantial resource slack" will keep inflation "subdued for some time," came out on the same day that February price data began to roll in. The Bureau of Labor Statistics reported that import prices fell 0.3 percent in February, its first decline since last July. The decline was result of a 2.2 percent fall in the price of imported petroleum and a 0.1 percent decrease in capital goods prices. Yet, even after filtering out the decline in the price of fuel imports (which fell 1.9 percent as a whole), import prices grew a modest 0.2 percent--its smallest increase since last July. Year-to-year, import prices have increased 11.2 percent, largely the result of a sharp 70.8 percent surge in the price of imported fuel. Without fuel, import prices have grown 2.0 percent. Export price fell 0.5 percent during the month, including a 3.8 percent decline in the price of agricultural exports.

Housing starts fell 2.7 percent in February to a seasonally adjusted annualized rate of 575,000 units. The Census Bureau data came out a day after the National Association of Homebuilders reported that its Housing Market Index slipped two points in March to a seasonally adjusted reading of 15. (A reading of 50 is the threshold between a "good"and "bad" market for new homes). The index, which measures the confidence of home builders, improved in two regions--Northeast and West--but declined in the South and Midwest. The index for current sales of single-family homes fell two points to 15 while that for expected sales over the next six months declined three points to 24. In the press release, the association blamed both "poor weather conditions" and the continued influx of foreclosed and other distressed properties into the market as factors weighing down the new home sales.

Later today, watch for the February release of producer prices with the consumer price estimate coming out on Thursday. Thursday also brings the February leading indicators report from The Conference Board and fourth quarter 2009 current account data. Read about this week's data releases in next Monday's issue of AFP EconWatch.