Latest Economic, Inflation Data Suggest Fed May Stay On Hold

Fresh signs that the U.S. economy and inflation are growing moderately fueled speculation that the Federal Reserve won't cut interest rates anytime soon.

The Fed's Beige Book showest modest economic growth at the end of the fourth quarter and into early January, while the government reported that inflation at the wholesale level grew somewhat faster than expected in December.

Comments from Fed officials Wednesday reinforced the view that the central bank isn't likely to change its stance on rates for now.

"The funds rate is currently within the moderately restrictive range that appears appropriate," said Federal Reserve Bank of San Francisco President Janet Yellen. She explained that the Fed's current policy stance is sufficient to bring inflation down to "more acceptable levels" even though there remain risks that could push prices higher.

Yellen, a voting member of the Federal Open Market Committee, made the comments before the Arizona Council on Economic Education.

On Thursday, investors will get another read on inflation when the consumer price index is released at 8:30 am New York time. The CPI is expected to have grown 0.5%, in December. Excluding food and energy, the inflation measure is expected to be up 0.2%.

Retail Sales Grow Modestly

On Wednesday, the Producer Price Index showed a 0.9% increase in December, slightly ahead of the 0.6% rise expected. Excluding volatile food and energy prices, the index's so-called core PPI inched up a smaller 0.2%.

The Beige Book, meanwhile, showed that economic growth was supported by modest gains in retail sales and tight labor market. In addition, the report found prices increased only moderately, helped by an easing in energy costs.

Also, industrial output gained a stronger-than-expected 0.4% in December, fueled
by robust increases in manufacturing and mining, according to a report from the Federal Reserve. Analysts had predicted a 0.1% rise in the output of factories, mines and utilities.

Finally, the capacity use rate of factories, mines and utilities was 81.8% in December, in line with expectations, up slightly from a revised 81.6% in November, previously reported at 81.8%.

The Beige Book is based upon anecdotal information collected by the regional Fed banks from businesses and other contacts in their districts. Its findings will be considered when policy-setting members of the FOMC meet on Jan. 30-31.

"This really, right now, is everything the Fed could possibly want," said Deutsche Bank Chief U.S. Economist Joe LaVorgna in an interview on CNBC.

According to Mike Englund, chief economist at Action Economist, the latest information supports the notion that the Fed will keep interest rates on hold at the moment.

"Overall, we think that the Fed probably has the view that there will be lingering weakness in factory sector from the housing pass-through. So they are probably willing to accept some weakness on the factory side as long as the service sector continues to perform well," Englund said, also on CNBC.

Mishkin Says Unemployment Low

One of the things that is helping to keep the weakness in housing contained is strong U.S. growth and a relatively low jobless rate, Federal Reserve Governor Frederic Mishkin told a group of reporters after a speech.

Mishkin said that an unemployment rate below 5% coupled with a strong U.S. economy makes this cycle in housing different from those in the past.

"The economy is still growing, we have unemployment at quite a low level," Mishkin said. "We have a much more benign environment for the housing market."

On Wednesday, a study found that homebuilders are continuing to gain confidence that sales will improve in the coming months.

The National Association of Home Builders' index of builder confidence for sales of new, single-family homes rose two points in January to 35 from a upwardly revised 33 in December. The index now stands at its highest level since last July.

The index, which remains far below year-ago levels, is based on a survey of homebuilders, who answered questions about sales prospects now and in the near-term. When the index is over 50, it means the number of builders who see "good" sales outnumber the number who see "poor" sales.

“Builders are starting to see that the worst is behind them and that buying conditions have improved to the point that greater optimism is warranted,” NAHB Chief Economist David Seiders said.