Weekly Update 02/21/2025: Fed Minutes Show Cautious Approach to Future Rate Cuts
- Walmart beats profit and revenue expectations while raising dividend 13%
- Johnson & Johnson sells bonds to fund acquisition of Intra-Cellular Therapies Inc.
- Stryker completes acquisition of Inari Medical, Inc.
- Apple introduces a new low-end smartphone called the iPhone 16e
Domestic Economic News
US housing starts slowed in January as builders pulled back on single- and multifamily home construction amid growing worries over mortgage rates and unsold homes. New residential construction decreased 9.8% to an annualized pace of 1.37 million last month, slipping after a nearly 16% surge in December, according to government data released Wednesday. That trailed the median estimate of economists surveyed by Bloomberg, who expected an annualized 1.39 million pace. Single-family starts fell 8.4% to an annualized rate of 993,000 in January amid exceptionally cold weather across the country, marking the first drop since October. Multifamily starts, meantime, fell 13.5% to an annualized 373,000, pulling back after a huge gain in December that some economists said likely resulted from seasonal adjustments. Economists and publicly-traded home builders expect the new-home market to see only modest growth this year, dragged down by mortgage rates near 7% and median prices that are 30% higher than in December 2019. Meantime, the prospect of 25% tariffs on goods from Mexico and Canada, a major source of US lumber, and a 10% tariff already in place on Chinese goods have reversed the jolt of confidence builders felt after President Donald Trump’s election in November. Home contractors thus far have kept luring customers with sales incentives, including mortgage rate buydowns, where they make upfront payments on customers’ behalf to lower financing costs. However, builders increasingly are worried about the supply of new homes on the market — which is currently the highest since December 2007 — and have been slowing construction. Atlanta-based builder PulteGroup Inc. last month told investors it plans to adjust prices to sell off its spec homes, which have reached higher-than-normal levels. The number of new homes under construction fell 1.4% in January, continuing a downward trend over the past year. Home completions, meantime, rose in January for the first time since August. Building permits, a leading indicator of future construction, edged higher in January, while single-family permits were unchanged. Across the US, starts fell in the South, Midwest and Northeast, while the West registered an increase. The new residential construction data are volatile, and the government report showed 90% confidence that the monthly change ranged from a 22.3% decline to a 2.7% gain. The National Association of Realtors will provide a look at the previously owned home market on Friday, when it releases monthly data on existing-home sales.
Applications for US unemployment benefits were little changed last week, hovering around pre-Covid levels that indicate solid demand for workers. Initial claims increased by 5,000 to 219,000 in the week ended Feb. 15, according to Labor Department data released Thursday. The median forecast in a Bloomberg survey of economists called for 215,000 applications. Continuing claims, a proxy for the number of people receiving benefits, increased to 1.87 million in the week ended Feb. 8. Economists are looking to the jobless claims series for early signs of the impact of the Trump administration’s firings across the federal workforce. However, the weekly data can be volatile, and it’s unclear how many government workers are eligible for unemployment benefits. In the DMV area — which refers to Washington, DC, Maryland and Virginia — claims actually fell last week after a surge in the prior period. Applications in the capital itself stand at the highest in almost two years. Nationwide, initial claims have been generally consistent with levels seen in 2019, supporting the Federal Reserve’s intention to keep interest rates on hold until inflation progress resumes. That said, some high-profile companies like Meta Platforms Inc. and Southwest Airlines Co. have said they plan to reduce staff. The four-week moving average of new applications, a metric that helps smooth out fluctuations from week-to-week, was little changed at 215,250.
Mortgage rates in the US declined for a fifth week, pushing borrowing costs to the lowest point since late December. The average for 30-year loans was 6.85%, down from 6.87% last week, Freddie Mac said in a statement. While mortgage rates have been easing for more than a month, they’ve been stuck above 6.5% since late October. High borrowing costs are causing many potential buyers to pull back, keeping a lid on sales. But the fact that rates have hovered in a fairly tight range could help reassure buyers, according to Sam Khater, Freddie Mac’s chief economist. “This stability continues to bode well for potential buyers and sellers as we approach the spring homebuying season,” Khater said. Supply constraints that have plagued the housing market in recent years are starting to ease. In the four weeks through Feb. 16, new listings rose 4.2% from a year earlier to the highest level in three years, according to Redfin Corp. The Federal Reserve’s policy risks keeping mortgage rates higher for longer. Minutes released Wednesday showed that policymakers expressed a readiness to hold interest rates steady at their meeting in January.
Interest Rate Insight and the Fed
Federal Reserve Bank of Philadelphia President Patrick Harker said monetary policy is well positioned as officials wait for more progress on inflation. Harker said policy “remains restrictive” after three cuts last year, and he expects interest rates to continue falling in the long run. He said economic growth and production remain resilient and the labor market is in balance. “These are reasons enough for holding the policy rate steady,” Harker said Monday in remarks prepared for an event in the Bahamas. “And while I won’t commit to a specific timetable, I remain optimistic that inflation will continue a downward path and the policy rate will be able to decline over the long run.” Fed officials left borrowing costs unchanged last month after lowering their benchmark rate by a full percentage point in late 2024. Fed Chair Jerome Powell told lawmakers last week the Fed doesn’t need to hurry to lower rates after last year’s cuts. Policymakers want to see further progress on inflation and signaled they need more time to learn about President Donald Trump’s economic policies. Harker greeted with skepticism data showing the consumer price index rose in January by the most since August 2023, with broad increases for a range of household expenses such as groceries, gas and housing. “In the last decade, CPI inflation in January has surprised on the upside 9 out of 10 times,” he said. “My conjecture is that seasonal adjustments are struggling to keep up with a fast-changing economy, and we need to parse the underlying trends from the month-to-month noise.” The Philadelphia Fed chief said he fully supported the decision to leave rates stable last month. He said rates are at a good level to bring inflation back to the central bank’s 2% target in the next two years if the economy evolves as he anticipates.
Federal Reserve officials in January expressed their readiness to hold interest rates steady amid stubborn inflation and economic-policy uncertainty. “Participants indicated that, provided the economy remained near maximum employment, they would want to see further progress on inflation before making additional adjustments to the target range for the federal funds rate,” minutes from the Federal Open Market Committee’s Jan. 28-29 meeting showed. The minutes, released Wednesday in Washington, said “many participants noted that the committee could hold the policy rate at a restrictive level if the economy remained strong and inflation remained elevated.” Officials held the Fed’s benchmark policy rate in a range of 4.25%-4.5% at that gathering. The record of the meeting underscored the cautious approach Fed policymakers are taking after lowering interest rates by a percentage point in the closing months of 2024. Several officials have said they’d like to see inflation cool further toward the Fed’s 2% target before backing another cut. Investors are currently pricing in one rate cut in 2025, with the possibility of a second, according to futures markets. Some officials also expressed concern over risks posed by the potential for another debt-ceiling showdown in Washington. “Regarding the potential for significant swings in reserves over coming months related to debt ceiling dynamics, various participants noted that it may be appropriate to consider pausing or slowing balance sheet runoff until the resolution of this event,” the minutes said. The Fed is currently allowing up to $25 billion in Treasuries and $35 billion in mortgage-backed securities to mature each month without reinvesting the returned principal. The US government reached its statutory limit for outstanding debt in January. The Treasury Department has since been using so-called extraordinary measures to extend its ability to pay the federal government’s expenses. President Donald Trump has backed a plan from House Republicans that would raise the debt ceiling by $4 trillion, but that would likely take months to negotiate.
Policymakers are also watching the rollout of Trump’s economic-policy plans and how they might shape the economy. Trump is pushing an agenda that includes an increased use of tariffs on US trading partners and an immigration crackdown, both of which could affect the outlook for inflation, the labor market and economic growth. While characterizing risks in the economy as roughly balanced, policymakers “generally pointed to upside risks to the inflation outlook,” the minutes said. “Participants cited the possible effects of potential changes in trade and immigration policy, the potential for geopolitical developments to disrupt supply chains, or stronger-than-expected household spending,” the minutes showed. Still, officials expected that “under appropriate monetary policy” inflation would continue to decline toward their 2% goal. Some policymakers also noted that difficulties in fully removing seasonal distortions from inflation data at the start of the year could make the figures “harder than usual to interpret.”
Impactful International News
While our markets here in the US were closed for President’s Day on Monday, European bonds fell and shares in defense companies rallied on the likelihood of greater military spending, which could force governments to step up borrowing in the coming years. German, French and Italian bonds all slipped, with 10-year bund yields — the benchmark borrowing rate for the euro area — reaching the highest in more than two weeks. Europe’s Stoxx 600 index rose 0.4%, while a Goldman Sachs Group Inc. index of European defense shares topped a record high. German defense firm Rheinmetall AG soared as much as 11%, helping lift the Frankfurt bourse to a new record high. The moves came as the US asked European nations to spell out what security guarantees and equipment they can offer Ukraine to ensure a lasting peace settlement. European officials say they are working on a major package to ramp up defense spending and some EU leaders are meeting in Paris to draw up their response. “The goalposts are shifting, and the EU is realizing they can rely less and less on the US for protecting their borders. In lockstep, we’re going to have to see European countries spend more on defense,” said Aneeka Gupta, head of macro research at Wisdomtree UK Ltd. “That does warrant a bit more caution on bonds.”
The developments have cemented the view that debt sales will need to increase as European nations shoulder the cost of a lasting peace deal between Ukraine and Russia. Upgrading defense and protecting Ukraine may cost Europe’s major powers an additional $3.1 trillion over 10 years, according to Bloomberg Economics estimates. France’s minister for European affairs, Benjamin Haddad, told Bloomberg TV ahead of the Paris meeting that joint EU bonds could be issued to fund defense, an option that’s so far divided the bloc. Meanwhile, European stocks also got a boost from China this week, a key export market. A meeting between President Xi Jinping and business figures including Alibaba Group Holding Ltd. co-founder Jack Ma raised hopes that a years-long crackdown on the private sector is ending.
Investor confidence in Germany’s economy improved by the most in two years, with elections this weekend set to produce a more market-friendly government and interest-rate cuts bolstering demand. The ZEW institute’s index of expectations rose to 26 in February from 10.3 in January — more than economists had forecast. A measure of current conditions rose, but by less. “This rising optimism is probably due to hopes for a new German government capable of action,” ZEW President Achim Wambach said Tuesday in a statement. “Also, after a period of absent demand, private consumption can be expected to gain momentum in the next six months.” The economy has been at the center of Germany’s election campaign, with the likely next chancellor, Friedrich Merz, promising to rekindle growth by reducing taxes, regulation and social handouts. Europe’s biggest economy contracted for a second straight year in 2024 and is expected to tread water in 2025. Germany’s export-oriented manufacturing sector is chiefly responsible for the malaise, suffering from weak demand in China, high energy costs and geopolitical uncertainty. While a gauge of activity has improved recently, it still signals declining output.
Company Events
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