UNITED STATES ECONOMY
FOMC RATE DECISION
Release Date: January 27, 2010
For immediate release
Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.
In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit wil be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.
Summary
Overall economic activity continued to weaken across almost all of the Federal Reserve Districts since the previous reporting period. Most Districts noted reduced or low activity across a wide range of industries, although a few Districts noted some exceptions in some sectors.
District reports indicate that retail sales were generally weak, particularly during the holiday season. A majority of Districts noted deep discounting during the holiday sales season. Vehicle sales were also weak or down overall in the Districts reporting on them. Manufacturing activity decreased in most Districts. Declines were noted in a wide range of manufacturing industries, with a few exceptions. Services sector activity generally declined across the Districts, with exceptions in some sectors of the Boston, Richmond, and Chicago Districts. Additionally, several Districts noted weaker conditions in transportation services and slow or decreased demand in tourism activity. Conditions in residential real estate markets continued to worsen in most Districts. Reduced home sales, lower prices, or decreases in construction activity were noted in many Districts. Commercial real estate markets deteriorated in most Districts, with weakening construction noted in several Districts. Overall lending activity declined in several Districts, with tight or tightening lending conditions reported in most Districts. Credit quality remained a concern in several Districts. Agricultural conditions were mixed in response to varying weather conditions across the Districts. Mining and energy production activity generally declined since the previous report.
Most Districts reported a general weakening of labor market conditions. Lower energy prices were noted in many of the Districts, and, except for the Richmond District, which mentioned higher prices for raw materials, most reporting Districts noted declining input prices. Wage pressures remained largely contained, and some Districts reported pay freezes or reductions in compensation.
Consumer Spending
Reports of retail sales during the holiday season were generally negative in most Districts. Retail sales during the holiday season were weak or mostly down in the Boston, New York, Philadelphia, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco Districts. However, some contacts in the Boston and New York Districts noted that sales picked up after the holidays. Retail sales in the Cleveland District were flat to down in November (on a month-over-month basis). Most retailers in the Richmond District had disappointing sales during the holiday season. Discount stores fared relatively better in the Philadelphia, Cleveland, Atlanta, Chicago, and San Francisco Districts, although discount stores in the Dallas District reported weak holiday sales. Deep discounting during the holiday season was reported in the New York, Philadelphia, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts. Several Districts reported that luxury and big-ticket items (e.g., jewelry, appliances, and electronics) were weak sellers. Richmond reported that sales of gift cards were weaker than the previous year. In the New York District, cold-weather apparel was a relatively strong seller. Many retailers in the Philadelphia, Atlanta, Kansas City, and Dallas Districts expected continued weakness or sluggish sales. However, expectations were mixed in the Cleveland District, and retailers in the Boston District were watchful.
Each of the ten Districts that reported on vehicle sales indicated that sales during the season were weak or down overall (Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco). Sales of domestic brands were especially weak in the Richmond and Dallas Districts. Chicago reported increased demand for light trucks and San Francisco reported a slight increase in sales of larger used vehicles. Both of these changes were reported to be in response to falling gas prices. In addition, Dallas reported an increase in sales of used vehicles. Several Districts reported a negative outlook among car dealers.
Manufacturing and Other Business Activity
Manufacturing activity continued to fall in most Districts since the previous report, with declines reported across a wide range of industries. Cleveland noted a slump in steel shipping and Chicago noted that domestic steel production slowed. Dallas and Philadelphia indicated that industries related to construction experienced large drops in orders, and Richmond noted that import activity for construction and household products remains notably low. San Francisco reported that activity for producers of wood products remains depressed. Kansas City, St. Louis, Cleveland, and Dallas noted decreases in auto and auto-related manufacturing activity. Cleveland, Dallas, and San Francisco reported that capacity utilization was below normal levels or declined. Boston, Philadelphia, Cleveland, Minneapolis, Chicago, and Kansas City mentioned reductions in capital spending or plans to reduce capital spending in 2009. In contrast, firms in defense and medical-device production in the Minneapolis District reported increased activity, and San Francisco noted that aerospace manufacturing continued at a high level. Food manufacturing and processing remained active in the Philadelphia and Dallas Districts and solid in the San Francisco District.
Activity in the services sector declined throughout most Districts. Cleveland, Richmond, Atlanta, St. Louis, Kansas City, and Dallas reported slowed or declining activity for transportation services, often related to the shipping of construction and manufactured goods. San Francisco, St. Louis, New York, Chicago, Kansas City, and Minneapolis reported declines in travel or tourism-related services. Richmond and Atlanta noted that tourism activity was mixed, and Boston indicated that a majority of consulting and advertising firms reported stable to strong demand. Service activity at auto dealers continued to be robust in the Chicago District, and it increased in the Dallas District.
Real Estate and Construction
Residential real estate activity continued to weaken in nearly all Districts. Boston, Philadelphia, Cleveland, Richmond, Atlanta, St. Louis, Kansas City, and Dallas reported that home sales were weak or had declined. San Francisco reported that despite some pickup in recent months, home sales continued to be quite slow in most parts of the District. In the New York District, the market for new homes continued to weaken in New Jersey, and the higher-priced housing markets nearest to New York City were characterized as especially weak. While the Minneapolis District reported that late December saw an up-tick in residential sale activity in the Minneapolis-St. Paul area, it was reportedly driven by foreclosures and short sales. Increased home sale cancellations were common in a few Districts. Contacts in the Dallas District reported that home sale cancellations remained prevalent, in some cases outpacing sales. Elevated cancellation rates and weak showroom traffic in the Chicago District led developers to remain cautious about expanding inventory levels, and some building contractors in the Cleveland District reported increased inventories because of take-backs from home sales that fell through. Boston, Philadelphia, Atlanta, Kansas City, and San Francisco reported that home prices continued to soften or fall. Median selling prices declined in and around New York City and were reported to have edged down in the Dallas District. Richmond, however, reported that home prices remained steady.
Reporting Districts generally saw a decrease in homebuilding. Atlanta reported that homebuilders continued to pull back on home construction. The Philadelphia and Chicago Districts noted that residential building continued its decline. Residential construction was down in the St. Louis District, remained weak in Cleveland, and was quiet in Minneapolis.
Commercial real estate markets deteriorated in most Districts. Contacts in the Boston District described the commercial real estate market as grim and depressing, and market conditions continued to deteriorate in Richmond. In the Minneapolis District, a contact noted that the market remained in a downturn that has now lasted more than a year. Commercial real estate transactions in the Dallas District have reportedly ground to a halt. Leasing activity was minimal in the Boston District, continued to fall in the Philadelphia District, and was assessed as ranging from slowing to frozen in the Richmond District. Contacts in the Chicago District reported increases in sublease space. Office and industrial leasing is expected to remain steady through the first half of 2009 in the St. Louis District, but San Francisco reported that conditions in their commercial office market remained exceptionally weak. The New York District reported that Manhattan's office vacancy rate climbed to its highest level in two years. Contacts in the Chicago District noted elevated vacancy rates, and contacts in the Kansas City District expected higher vacancy rates going forward. Contacts in the Atlanta District also anticipate that more commercial space will become available.
Reports about commercial construction activity also were downbeat. In the Philadelphia District, commercial construction activity continued to fall. Cleveland reported that construction backlogs have declined for some contractors. Commercial contractors in the Atlanta and Chicago Districts reported declines in building activity and noted that more projects were cancelled or postponed. In St. Louis, contacts in commercial and industrial construction predicted a challenging environment in early 2009. San Francisco reported that commercial construction activity was very limited. Construction-related manufacturing contacts in the Dallas District reported that demand from commercial construction is shrinking rapidly.
Banking and Finance
Most Districts that reported on lending activity indicated that it continued to decline or remained weak, and many Districts reported that credit conditions remained tight or tightened further. Overall lending activity was reported to have slowed or declined in New York, St. Louis, Kansas City, and Dallas; it remained soft or weak in the Chicago and San Francisco Districts. Philadelphia reported a slow rise in outstanding loan volume with gains in real estate loans and consumer credit, but no business-loan growth. Demand for commercial loans was stable to decreasing in the Cleveland and Richmond Districts. Kansas City reported that demand fell for commercial and industrial loans, while San Francisco indicated that commercial and industrial loan volumes were at very low levels. In contrast, St. Louis reported a slight increase in commercial and industrial loans. New York, Cleveland, Richmond, Chicago, Kansas City, and San Francisco noted an increase in residential mortgage refinancing activity. Demand for consumer loans declined in the Cleveland, Kansas City, and Dallas Districts. St. Louis reported an increase in loans to individuals.
Regarding credit conditions, Boston reported that credit availability continues to be a major barrier to commercial real estate activity, and San Francisco noted that the availability of credit remains quite constrained. The New York and Atlanta Districts indicated a general tightening of credit standards, while Kansas City noted tighter standards for commercial real estate and commercial and industrial loans. Credit standards were described as unchanged to tightening further by Cleveland and Richmond, while Dallas noted that depository institutions maintained tight credit standards. Chicago reported that credit conditions remained tight. Credit quality declined or remained a concern in the New York, Philadelphia, Cleveland, Chicago, Kansas City, Dallas, and San Francisco Districts. Default rates on commercial loans are expected to rise in the Boston District. Richmond indicated mixed reports on credit quality.
Agriculture
Weather conditions since the previous report had mixed effects on agricultural activity. Recent rain eased drought conditions in most of the Atlanta District, while parts of the Dallas District were still severely dry. Weather conditions allowed for fieldwork in the Atlanta and Minneapolis Districts but delayed fieldwork in the Richmond and Chicago Districts. The winter wheat crop in the Kansas City District was in good condition, while winter wheat development in the Richmond District was hindered by cooler temperatures and rain in recent weeks. The livestock sector in the Kansas City District and the poultry sector in the Atlanta District reported slowed activity, while production of red meat and some types of poultry decreased in the St. Louis District. The Atlanta, Kansas City, Dallas, and San Francisco Districts reported that farm input costs (e.g., fuel and fertilizer) have moderated or declined recently. Dallas reported that commodity prices have dropped, but Chicago and Kansas City reported that corn and soybean prices have rebounded slightly.
Natural Resource Industries
Activity in the energy sector declined in several Districts since the previous report, with a number of Districts linking the decrease to lower energy prices. In the Atlanta and Minneapolis Districts, oil and gas exploration declined. Kansas City reported a dramatic slowing in energy activity, and Dallas reported a decrease in drilling activity and a decline in the number of active oil rigs since the previous survey. In contrast, energy production did not change in the Cleveland District, and coal production in the St. Louis District was higher in December 2008 than in December 2007. Looking ahead, contacts in the Cleveland and Kansas City Districts expect drilling activity to decline for the first few months of 2009. Regarding capital spending, contacts in the Atlanta District indicate that oil and gas exploration firms re-evaluated expansion plans in response to lower oil prices and difficulty obtaining credit. Energy producers in the Kansas City District are cutting capital budgets, but producers in the Cleveland District expect little change to their capital spending in early 2009. Finally, iron ore production in the Minneapolis District decreased since the previous report.
Labor Markets
Most Districts reported a general weakening of labor market conditions. Most Districts reported that layoffs continued, and Boston, Cleveland, Richmond, Atlanta, and Dallas noted hiring freezes for select firms. Atlanta, Chicago, and Dallas reported reduced hours to control costs. Job losses in the manufacturing sector were reported by contacts in the Cleveland, Richmond, Chicago, St. Louis, Minneapolis, Kansas City, and Dallas Districts. Dallas noted that layoffs were becoming widespread in the energy industry, and New York noted that a substantial number of job reductions in the financial sector have yet to show up in payroll statistics. Richmond reported weaker demand for temporary workers. In contrast, contacts in Chicago indicated that demand for skilled workers remained strong. Richmond noted that demand was strongest for workers providing professional and support services, workers with high-level technical skills, and workers proficient in computer software. Chicago noted employment growth in the education, government, and healthcare fields. St. Louis also noted job growth in some small business support services firms. Cleveland reported continued hiring in defense-related and healthcare industries.
Prices
Consumers saw sizable holiday price cuts in retail stores in a majority of the Districts. Retail contacts in the New York, Philadelphia, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts reported heavy holiday discounting. Retailers and restaurant contacts in the Kansas City District lowered prices and anticipated further declines in the months ahead. Lower energy prices were noted throughout many of the Districts. Most contacts in the Atlanta District reported reduced input price pressures, and about half of the contacts in manufacturing and related services in the Boston District reported falling input prices. Boston reported large price decreases for energy, oil-based materials, paper, and cotton in particular. In the Kansas City District, raw materials prices fell sharply, and manufacturers in general reported a corresponding decline in finished product prices. Manufacturers in the Philadelphia District also reported decreases in commodity prices and some reported a reduction in the prices of their own products as well. Contacts in the Cleveland District observed that the downward trend in raw materials prices has started to level off and that pricing of manufactured products remained relatively stable. On the other hand, the Richmond District noted that raw materials prices rose at a slightly quicker pace since last reported. Contacts in the San Francisco District reported that they expect upward price pressures to remain very limited during early 2009.
Wages
Wage pressures remained largely contained in most Districts. The Cleveland, Chicago, Dallas, and San Francisco Districts reported little to no wage pressures. Richmond noted that wage gains in the retail sector held up, but average wage increases slowed for service firms. Wage increases were modest in the Minneapolis District, and wage pressures diminished in the Kansas City District. A few Districts experienced slowing wage gains in sectors that had previously seen rapid wage advances, notably the energy sector in the Cleveland District and the technology sector in the San Francisco District. According to reports from the New York District, year-end bonuses at financial firms are seen falling 20 to 30 percent from a year ago at some of the smaller firms but more substantially at the larger establishments. The Boston, Chicago, and San Francisco Districts also noted that some contacts are enacting or considering pay freezes or reductions in compensation.
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