As expected, the Federal Open Market Committee left short-term rates unchanged, with the federal funds target range from 2.25 to 2.50 percent, which is where the committee left it after its December 18–19 meeting. More importantly, the Federal Reserve said it would be “patient” before taking further actions, looking for signs in the data that further normalization of rates would be warranted. This will likely mean one or possibly no rate hikes in 2019—a more “dovish” stance than just three months ago, consistent with slower economic growth with reduced pricing pressures.
The Federal Reserve forecasts 2.1 percent growth in 2019, down from an estimate of 2.3 percent in December’s projections, with 1.9 percent growth in 2020. The labor market is expected to remain solid, with the unemployment rate near 50-year lows. The FOMC predicts an unemployment rate of 3.7 percent and 3.8 percent in 2019 and 2020, respectively, with both 0.2 percentage points higher than in the estimate three months ago.
Freddie Mac reported that 30-year mortgage rates fell to 4.28 percent for a 30-year mortgage last week, the lowest rate since February 2018 and a nice reversal after nearing 5 percent in November. Reduced mortgage rates have helped to boost demand, with builder optimism rebounding from weaknesses at the end of last year and existing home sales jumping 11.8 percent in February.
In the Philadelphia Federal Reserve Bank’s district, manufacturing activity rebounded in March after declining for the first time since May 2016 in February, led by stronger new orders and shipments. Growth in hiring slowed slightly in March, but the labor market is expected to stay strong over the coming months. Indeed, 73.6 percent of respondents said their company was experiencing a skills shortage in 2019, up from 63.8 percent in 2018.
New orders for manufactured goods inched up 0.1 percent in January, edging slightly higher for the second straight month after falling in both October and November. Excluding transportation equipment, factory orders declined 0.2 percent in January. On a more encouraging note, new orders for core capital goods—a proxy for capital spending in the U.S. economy—increased 0.8 percent in January, with 4.1 percent growth over the past 12 months.
At the same time, sentiment data in the manufacturing sector have weakened lately. For instance, the IHS Markit Flash U.S. Manufacturing PMI dropped to 52.5 in March, the weakest pace since June 2017. New orders, output, exports and hiring slowed, even as these measures continued to reflect modest growth overall. Encouragingly, manufacturers completing the survey felt more upbeat about production over the next six months.
Separately, the IHS Markit Flash Eurozone Manufacturing PMI contracted for the second straight month, declining at the fastest pace since April 2013. Germany contracted for the third consecutive month, with output declining at the fastest pace since August 2012. In addition, French manufacturers reported contracting activity in March for the second time in the past four months on reduced sales, exports and production.