Yellen Signals Rate Hike As Early As March Meeting; Consumer Sentiment Up Post-Holidays, Inauguration

February 15, 2017
Federal Reserve Chair Janet Yellen signaled a rate hike could come as soon as the March 14-15 meeting; The Consumer Price Index (CPI) increased in an upside surprise from the market consensus in January; Retail sales rebounded in January, suggesting positive consumer sentiment following the holiday season and the presidential inauguration; Industrial production fell by 0.3% in January as unseasonably warm weather caused a major 2.6% drop in utilities output; U.S. crude oil inventories increased meaningfully above the upper limit of the average range for this time of year. 

Policy Watch

  • Federal Reserve Chair Janet Yellen gave testimony in front of the Senate Banking Committee on Tuesday in which she said central bank would likely raise short-term rates at upcoming meetings amid an improving economy, signaling a rate hike could come as soon as the March 14-15 meeting. Chair Yellen declined to say whether a rate increase next month was likely, commenting that it would be unwise to force too rapid of hikes, which could trigger a recession. Senators on the committee focused primarily on economic and regulatory issues, including the potential economic impact of President Trump’s proposals, though Yellen said that it was too early to know as of now. Chair Yellen defended the 2010 Dodd-Frank financial reform bill, which is slated for dismantle by the White House and Republicans in Congress, but she also indicated openness to working with Treasury Secretary Steve Mnuchin on reviewing post-financial crisis rules to consider room for improvement. Yellen said that the Fed is not in any hurry to start shrinking its balance sheet, which would result in tighter financial conditions. [WSJ]

Economic Indicators & News

  • The Consumer Price Index (CPI) increased 0.6% sequentially in January, an upside surprise from the market consensus for 0.3% price growth, as the all items index during the prior 12 months was up 2.5% – the largest gain since February 2013. The energy and gasoline indexes surged and were largely responsible for the increase in the broader index, as the energy component was up 4.0% as gasoline accelerated 7.8%. The index less food and energy rose 0.3%, led by apparel, new vehicles, and airfares, all increasing by at least 0.8%. Food was up 0.1% with food at home unchanged and food away from home increasing 0.4%. The energy component is 10.8% higher on the year, its largest 12-month increase since November 2011, while the food index has fallen 0.2% over the same period. [BLS]
  • Retail sales rebounded in January, suggesting positive consumer sentiment following the holiday season and the presidential inauguration, as purchases advanced 0.4% in the month, exceeding expectations for a 0.1% increase. Sales excluding volatile auto and parts rose 0.7%. Purchases at department stores and at electronics and appliance stores were up, gaining 1.2% and 1.6%, respectively, from a year earlier. Gasoline sales increased 2.3%, led by higher energy prices, and are up 14.2% on the year. Sales at nonstore retailers, the emergent category that includes internet merchants such as Amazon.com, were flat in January, though they are 12.0% higher than a year ago. Motor vehicle sales declined 1.4% but are 6.8% higher than January 2016. Nominal retail sales during November totaled $472.1 billion, or 5.6% over the prior 12 months. [Census]
  • Industrial production fell by 0.3% in January as unseasonably warm weather caused a major 2.6% drop in utilities output, which was offset by gains of 0.3% and 0.4% in manufacturing and mining, respectively. The metric, which describes output at factories, mines, and utilities, indicated a rise of 0.5% in capacity utilization to 75.3% while manufacturing activity grew by 0.2%, led by a 2.8% gain in mining volumes and offset by a 2.8% decline in automotive manufacturing. Consumer goods production fell by 0.8%, reflecting a drop in both consumer energy and consumer durables, while the output of business equipment edged up with increases in information processing equipment. Construction supplies rose 0.9% as non-energy business supplies gained 0.3%. Capacity utilization for durables was 76.2%, nondurables was 75.0%, and publishing and logging was 59.9%. The market consensus was for a 0.6% rise in industrial production and for capacity utilization to increase to 75.6%. [Federal Reserve]
  • U.S. crude oil inventories increased by 9.5 million barrels last week as total crude reserves stood at 518.1 million barrels, meaningfully above the upper limit of the average range for this time of year, though American petroleum imports were by 881,000 barrels lower totaling 8.5 million barrels per day. Petroleum refinery inputs fell by 435,000 barrels per day to 15.5 million as refineries operated at 85.4% of their available capacity. Gasoline production decreased last week to average 9.0 million barrels per day while distillate fuel production fell to 4.5 million barrels per day. Total product supplied to end users moved lower by 2.0% over the year ago period to 19.4 million barrels per day. Motor gasoline supplied dropped 5.3% over the same period last year to 8.4 million barrels. [EIA]

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