The minutes from the FOMC’s January meeting were released yesterday, revealing that the Fed believes that keeping interest rates low and continuing asset purchases are necessary to support the economic recovery. The Fed indicated that December’s $900B stimulus package, the prospect of a new round of stimulus and the continued distribution of the COVID-19 vaccines “would lead to a sizable boost in economic activity.” They also noted that “the pandemic continued to pose considerable risks to the economic outlook.” Members of the committee “agreed that the economy remained far from the [Fed’s] longer-run goals and that the path ahead remained highly uncertain.”
This morning, the Labor Department reported that initial jobless claims rose to 861,000 last week and the prior week’s claims were revised higher by 55,000, reversing a downward trend seen over the past few weeks. During a virtual speech to the Economic Club of New York last Wednesday, Fed Chair Powell stated that the unemployment rate is significantly higher than the reported 6.3%, estimating that it is closer to 10%. He stressed that the rate needs to take into account the number of people who have left the labor force, stating that “Correcting this misclassification and counting those who have left the labor force since last February as unemployed would boost the unemployment rate to close to 10 percent in January.” In positive news, retail sales jumped by 5.3% in January, the largest increase in seven months, supported by fiscal stimulus and rehiring of furloughed workers. Expectations for first quarter growth have been revised higher with the Federal Reserve Bank of Atlanta’s GDPNow model now predicting a 9.5% annual growth rate during the first three months of the year, up from an estimate of just 4.5% a week prior.
Fed Funds Futures Contracts
Long-term bond yields and inflation expectations have risen substantially in recent weeks, but Fed funds futures contracts are not yet pricing in interest rate hikes within a two year horizon.