As expected, the Federal Open Market Committee (FOMC) left the target range for the federal funds rate unchanged, at 2.25%-2.50%. The FOMC made a technical change to the interest on excess reserves rate (IOER), lowering it by 5 basis points to 2.35%, to push the effective federal funds rate back toward the middle of the range – but this was not a change in the stance of monetary policy. The FOMC acknowledged that consumer spending and business fixed investment slowed in the first quarter and that inflation was below the Fed’s 2% goal. However, in his press conference, Fed Chair Powell downplayed low inflation as being due to transitory factors, and when asked about the possibility of cutting rates, Powell responded that “we don’t see a strong case for moving in either direction.”
The April Employment Report was quirky. Nonfarm payrolls rose by 263,000, led by gains in professional & business services, education & healthcare, and government. Construction payrolls rose moderately, but manufacturing posted only a modest gain and we continued to lose jobs in retail. Seasonal adjustment (a late Easter) may have distorted the April payroll figure, although bad weather in February likely pushed out seasonal gains (unadjusted payrolls rose by 2.13 million between January and April, vs. 2.38 million a year ago). Average Hourly Earnings rose 0.2% (+3.2% y/y), up 0.3% for production workers (+3.4% y/y). The unemployment rate fell to 3.6% (from 3.8%), although that was due to a drop in labor force participation (probably a seasonal adjustment issue).
The week’s other data reports were mixed but generally consistent with moderate growth. Unit auto sales fell in April, after they spiked higher in March. The ISM monthly surveys were softer than expected. Consumer confidence improved.
Next week, the economic calendar thins out, with the two key inflation reports on Thursday and Friday. Both are expected to reflect higher gasoline prices, but core inflation should remain mild. The late Easter appears to have distorted apparel prices (down 1.9% in March, likely to snap back in April).
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