Tag Archives: Federal Reserve

Fed says shortages of materials, hiring problems holding back recovery

WASHINGTON (Reuters) -Shortages of materials and “difficulties in hiring” are holding back the U.S. economic recovery from the coronavirus pandemic and have driven a “transitory” bout of inflation, the Federal Reserve said on Friday.

“Progress on vaccinations has led to a reopening of the economy and strong economic growth,” the U.S. central bank said in its semiannual report to Congress on the state of the economy. However, “shortages of material inputs and difficulties in hiring have held down activity in a number of industries.”

The report will be the subject of hearings in Congress next week, including testimony from Fed Chair Jerome Powell about the outlook for the economy, inflation, and the transition of monetary policy as the impact of the pandemic recedes.

The report released by the Fed on Friday is largely backward-looking, but it documents the central bank’s view that the recovery remains on track as firms and families navigate a complicated economic reopening.

Prices have risen faster than expected, for example, and while the supply bottlenecks and other factors driving the price hikes are expected to ease over time, “upside risks to the inflation outlook in the near term have increased,” the Fed said.

Hiring has also slowed for an unexpected reason: Companies want to bring on more employees, but not enough workers are ready to take those jobs as they cope with ongoing health and family concerns and can rely on continued federal unemployment benefits to help pay the bills.

“Many of these factors should have a diminishing effect on participation in the coming months,” the Fed said, though the speed and strength of that labor market recovery also remains uncertain.

The central bank, however, said available data suggest “a further robust increase in demand” occurred from April through June.

“Against a backdrop of elevated household savings, accommodative financial conditions, ongoing fiscal support, and the reopening of the economy, the strength in household spending has persisted,” while the financial system remains “resilient,” the Fed said.

(Reporting by Howard SchneiderEditing by Paul Simao)

Analysis – A fine mess: Weak inflation prompts a global central bank reset

By Howard Schneider and Leika Kihara

WASHINGTON (Reuters) – It is an article of faith among central bankers that the decisions they make about how much money to create and what interest rate to charge for it will determine the rate of inflation – at least over moderate lengths of time.

For more than a decade that belief has been undermined by inflation that has remained weak despite trillions of dollars pumped into the world’s biggest economies through quantitative easing programs and ultra-low interest rates.

That prompted the top central banks to review how they do business, and on Thursday the European Central Bank joined the Federal Reserve and the Bank of Japan in pursuing an ambitious reset in hopes of reasserting control.

The ECB’s new framework, in contemplating the occasional “transitory period” when inflation exceeds its formal 2% target in hopes of ensuring that target is met over time, is a step short of the more explicit promise the U.S. central bank made last year to encourage periods of high inflation to offset years when price increases were too weak.

But their shared diagnosis paints a similarly troubling picture of a developed world seemingly set in a rut of slow economic growth, low productivity, aging populations, and perennially weak inflation that may be difficult to coax higher.

“The euro area economy and the global economy have been undergoing profound structural changes,” the ECB said in announcing its new framework, echoing language used by Fed officials in announcing their new strategy last year. “Declining trend growth, which can be linked to slower productivity growth and demographic factors, and the legacy of the global financial crisis have driven down equilibrium real interest rates.”

That, in turn, has given the ECB less room to use interest rate policy alone to help boost economic activity, and forced it, like the Fed, to resort more often to other measures – bond-buying for example – when economic conditions weaken.

The BOJ led the way down that path early this century.

The aims of the new U.S. and European inflation strategies, and those pursued so far unsuccessfully in Japan, are the same: Get the pace of price increases high enough so inflation-adjusted interest rates can also increase, giving the central banks room to use rate cuts as their main policy tool in times of stress.

CHASING AN AVERAGE

The concept of using inflation averaging has been slow to evolve. All three central banks at first adopted simple inflation targets of 2%, trusting that they understood inflation dynamics well enough to hit that level and stay there.

They didn’t.

Over time, they realized that between technology, globalization, demographics and other factors, inflation had become difficult to budge. Even more problematic, the continued “misses” against a well-publicized target risked resetting public expectations that inflation would remain weak.

Research by current and former Fed officials raised the stakes. They found that in a situation where equilibrium interest rates were low and central banks were repeatedly forced to cut their policy rates to near zero, inflation expectations would fall – permanently, a damaging outcome that would cement weak prices, wages, and growth as the norm.

Fed Vice Chair Richard Clarida, whose earlier academic research affirmed the advantages of simple inflation targeting, detailed this past January how subsequent studies by New York Fed President John Williams and others concluded more aggressive approaches were needed when interest rates were expected to keep collapsing to zero.

Interest rates stuck near zero “tend to deliver inflation expectations that, in each business cycle, become anchored at a level below the target,” Clarida said in a presentation to Stanford University’s Hoover Institution. “It can open up the risk of the downward spiral in both actual and expected inflation that has been observed in some other major economies.”

‘HISTORIC SHIFT’

The Fed’s new policy has been in place for just over 10 months. Its experience shows the challenges the ECB now faces.

The coronavirus pandemic and subsequent economic reopening have complicated the inflation outlook, with supply bottlenecks driving up prices more than – and perhaps for longer than – anticipated and a labor squeeze starting to drive up workers’ pay.

That has led to some new hawkish voices inside the Fed and hints at faster interest rate hikes from the U.S. central bank despite its stated promise to let inflation run above target “for some time.”

With the Fed yet to prove its new design in practice, bond markets have noticed.

The yield on the 10-year U.S. Treasury note, far from anticipating higher inflation and growth, has been falling, and on Thursday hit 1.25%, the lowest level since mid-February and a drop of nearly half a percentage point from mid-May.

As with the Fed, the ECB will have to translate its new strategy into policies that work.

The new strategy marks “a historic shift for the ECB,” by acknowledging inflation may need to exceed 2% at some point, wrote Andrew Kenningham, chief Europe economist for Capital Economics. But it “will not make it easy for the ECB to escape from the grips of low inflation.”

(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)

Fed officials say important they be ‘well positioned’ to act, minutes show

By Howard Schneider, Jonnelle Marte and Lindsay Dunsmuir

WASHINGTON (Reuters) – Federal Reserve officials last month felt that substantial further progress on the economic recovery “was generally seen as not having yet been met,” but agreed they needed to be poised to act if inflation or other risks materialized, according to the minutes of the U.S. central bank’s June policy meeting.

In minutes that reflected a divided Fed wrestling with the onset of inflation and financial stability concerns, “various participants” at the June 15-16 meeting felt conditions for reducing the central bank’s asset purchases would be “met somewhat earlier than they had anticipated.”

Others saw a less clear signal from incoming data and cautioned that reopening the economy after a pandemic left an unusual level of uncertainty and required a “patient” approach to any policy change, stated the minutes, which were released on Wednesday.

Still “a substantial majority” of officials saw inflation risks “tilted to the upside,” and the Fed as a whole felt it needed to be prepared to act if those risks materialize.

“Participants generally judged that, as a matter of prudent planning, it was important to be well positioned to reduce the pace of asset purchases, if appropriate, in response to unexpected economic developments, including faster-than anticipated progress toward the Committee’s goals or the emergence of risks that could impede the attainment of the Committee’s goals,” the minutes stated.

The Federal Open Market Committee at its meeting last month shifted towards a post-pandemic view of the world, dropping a longstanding reference to the coronavirus as a constraint on the economy and, in the words of Fed Chair Jerome Powell, “talking about talking about” when to shift monetary policy as well.

The start of that discussion, along with interest-rate projections showing higher borrowing costs as soon as 2023, caused investors to anticipate the Fed will move faster than expected to end its support for an economy still afflicted by high levels of unemployment and, now, rising inflation.

Long-term Treasury yields are near five-month lows, and the gap between those and shorter-term yields has been narrowing, a development often associated with skepticism about the outlook for longer-term economic growth.

In this case, Cornerstone Macro analyst Roberto Perli wrote recently, “the market views the perceived Fed shift as harmful to the long-term prospects for the U.S. economy,” with the Fed’s stated commitment to getting back to full employment seen as weakening in the face of higher-than-anticipated inflation.

Powell, speaking to reporters after the end of last month’s policy meeting, said any increase in the Fed’s benchmark overnight interest rate from the current near-zero level remained far off. He said, however, that the Fed would begin a “meeting-by-meeting” assessment of when to start reducing its $120 billion in monthly purchases of Treasury bonds and mortgage-backed securities, and of how to announce its plans for doing so.

The U.S. economy, he said at that point, was still “a ways away” from the progress on job creation the Fed wants to see before reducing its asset-purchase program, which supports the recovery by making the purchase of homes, cars and similar items more affordable by holding down borrowing costs for households and companies.

But “we’re making progress,” Powell said in the briefing, and to such an extent that he and his colleagues now needed to “clarify … thinking around the process of deciding whether and how to adjust the pace and composition of asset purchases.”

TAPERING TIMELINE

What investors are wondering is how fast the discussion will spool out and when the actual “taper” may begin.

Several regional Fed policymakers have since said they felt the economy was near the point where the central bank should pull back. However, even some of them have indicated it will take several meetings to develop and announce a plan for reducing the bond purchases.

The Fed’s policy-setting committee meets eight times a year, with the next two meetings scheduled for July 27-28 and Sept. 21-22. In the interim, the central bank will hold its annual research conference in Jackson Hole, Wyoming, a setting that Fed chiefs have often used to signal policy changes.

The U.S. economy added 850,000 jobs in June. If that pace of hiring continues over the summer, it “could prompt the Committee to accelerate the tapering timeline” from an expected start in January to as soon as October, analysts from Nomura wrote last week.

Economists polled by Reuters expect the Fed to announce a strategy for tapering its asset purchases in August or September, with the first cut to its bond-buying program beginning early next year.

(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)

U.S. jobless claims dropping faster in states ending federal benefit

By Howard Schneider

WASHINGTON (Reuters) – Ongoing claims for U.S. unemployment insurance have dipped faster in recent weeks in states ending federal benefits this summer than in states keeping the $300 weekly supplement in place until the fall, according to government data through last week.

From the week ending May 1 through the week ending June 12, continuing claims for state unemployment benefits fell 17.8% in the 26 states ending benefits early, to 990,000, and by 12.6%, to 2.18 million, in the rest of the country, according to a Reuters analysis of weekly federal unemployment data.

The data do not yet answer the larger and arguably more important question of whether hiring will also accelerate in those states, the outcome an almost all-Republican group of governors says is the goal of cutting the benefits early.

Weekly data from small business time provider Homebase through the week ending June 20 in fact has shown no pickup in hiring in the states cancelling unemployment benefits. To the contrary the other states appear to have added jobs faster in recent weeks – a possible consequence of the fact that large Democratic-led states like California and New York have recently lifted most of the remaining restrictions put in place to fight the pandemic.

The states stopping benefits as a group have also pulled closer to their pre-pandemic levels of unemployment, suggesting less room for improvement.

The issue of how unemployment benefits are impacting the recovery of the U.S. job market has become a core concern among Federal Reserve and other policymakers as they try to determine how fast national employment might rebound to pre-pandemic levels, a judgment hard to make until the economy is fully reopened and benefit levels returned to normal.

Twelve states have already halted benefits in what has been a largely partisan split between Republican governors arguing that the pandemic emergency unemployment payments are now discouraging people from working, and Democratic governors who feel people still need support as the pandemic wanes.

The states stopping benefits early include the entire Deep South, where pandemic unemployment has fallen hard on the large Black population, but only one state, Louisiana, with a Democratic governor. Only two Republican-led states, Vermont and Massachusetts in the Northeast, plan to continue the payments until they end nationwide in September.

The data overall suggest “more downward momentum in initial and continuing claims over the next few weeks,” said Jefferies economist Thomas Simons. Sky-high unemployment claims have been a hallmark of the pandemic, topping 23 million at one point in the spring of 2020 as the coronavirus took hold, more than 10 times the level at the start of the year.

(Reporting by Howard Schneider; Editing by Andrea Ricci)

Transitory or here-to-stay? Investors try to read the inflation clues

By David Randall

NEW YORK (Reuters) – From lumber prices to wages and inventories: Reading the clues around inflation has turned into an investor obsession.

The combination of supply bottlenecks from the reopening of the global economy and the resumption of economic growth sent consumer prices in May up by the largest annual jump in nearly 13 years. Employers are raising wages as they compete for scarce workers while retailers have limited inventories because of shipping and production delays.

As investors assess the risks of rising prices to financial markets, however, some think the biggest gains in inflation are already in the rear-view mirror. That is in line with the Federal Reserve’s notion that inflation will be “transitory.”

The Fed meets on Tuesday and Wednesday, and investors will parse every word of its post-meeting statement.

The Fed has been buying $80 billion in Treasuries and $40 billion in mortgage-backed securities monthly, putting downward pressure on longer-term borrowing costs to encourage investment and hiring. Discussions about tapering those purchases are likely at this week’s policy meeting.

“As long as the increase in inflation is modest, stocks could continue to move higher,” said Russ Koesterich, portfolio manager of the $27.6 billion BlackRock Global Allocation Fund.

Koesterich thinks inflation will likely run above trend lines well into 2022 given the bottlenecks in global supply chains. Yet disinflationary forces such as an aging global population and gains in efficiency due to technology will keep a lid on “any 1970’s-style inflation scare,” he said.

Investors who bet on inflation typically move into groups better-positioned to weather price rises, like materials and energy and companies with pricing power. Value stocks, in contrast, benefit from a broad economic recovery that does not become weighed down by steeply rising prices.

Koesterich said his fund has been decreasing its positions in growth stocks like technology and adding to industrials and European banks.

Jeff Mayberry, portfolio manager of the DoubleLine Strategic Commodity fund, thinks May’s inflation numbers will be the highest for the remainder of the year and remains bullish on oil, which hit a multi-year high on Friday. He sees the commodity benefiting from economic growth.

“The market was looking for a reason for inflation to be transitory and they got it,” Mayberry said of May’s inflation number, noting that some of the larger contributors came from short-term factors such as a spike in the price of rental cars.

Ernesto Ramos, chief investment officer at BMO Global Asset Management, also sees price rises as transitory. He cites a drop in lumber prices from May’s high that suggests supply chain bottlenecks will subside and “give us another reason to believe that inflation will remain under control.” Lumber prices are down more than 40% from record highs hit in early May.

REASONS TO WORRY

While the majority of investors believe inflation is transitory, according to a Bank of America fund manager survey, worries remain.

“Inflation has been the most discussed topic with clients for weeks, bordering on obsession,” wrote analysts at Morgan Stanley led by Michael Wilson. Those analysts think the rate of change on inflation is peaking.

Greg Wilensky, head of U.S. Fixed Income at Janus Henderson, said he has been buying more Treasury-Inflation Protected Securities as the break-even rate – a measure of expected inflation in the bond market – has retreated to near its February levels.

While he is not “changing my base case” that high inflation will prove to be transitory, “the risks around the base case continue to skew toward the upside on inflation,” given the persistent difficulties companies are having hiring lower-paid workers, Wilensky said.

The Fed’s statement could give important clues.

“I’m going to watch the Fed on Wednesday and if they treat these numbers with nonchalance it is a green light to bet heavily on the inflation trade,” Paul Tudor Jones of Tudor Investment Corp told CNBC on Monday. He said he would be “really concerned arguing that inflation is transitory” with inventories at a “record low” while demand is “screaming.”

Morgan Stanley Chief Executive James Gorman told CNBC on Monday that “my gut tells me that this economy is recovering faster, inflation is moving quicker and inflation may not be as transitory as we all expect.” He cited the global economic recovery and record levels of fiscal and monetary support.

“Even if investors disagree with the Fed’s often-stated mantra that inflation is just transitory, they have learned to respect the massive influence the world’s most powerful central bank has when possessing such conviction that is not even ‘thinking about thinking’ about easing its foot off the stimulus accelerator,” said Mohamed El-Erian, chief economic adviser at Allianz. “The resulting comfort with continued ultra-loose financial conditions is supportive in the short run of elevated stock prices and low yields.”

(Reporting by David Randall; Editing by Megan Davies and Dan Grebler)

U.S. inflation will accelerate if recovery stays on track: Kemp

By John Kemp

LONDON (Reuters) – U.S. consumer prices are rising at the fastest rate for several years, as the economy recovers from the coronavirus recession and manufacturing supply chains struggle to keep up with demand.

But the rate of inflation is still being flattered by the relatively modest increase in energy prices, masking the impact of faster increases in food products and other commodities.

If energy prices rise further in the second half of 2021 and into 2022, as the expansion matures, inflation could prove more persistent than anticipated by officials at the Federal Reserve.

The U.S. consumer price index has increased at a compound annual rate of 2.55% over the last two years, the fastest for more than eight years, according to data from the U.S. Bureau of Labor Statistics.

But energy prices have risen at an average rate of only 2.20% over the same period, which uses 2019 rather than 2020 as a baseline to avoid distorted comparisons caused by the first wave of the epidemic last year.

Prices for non-energy items have increased at a rate of 2.59%, the fastest for more than 12 years since the financial crisis of 2008/09.

Inflation has accelerated most sharply in the goods sector, where manufacturers have struggled to meet the surge in demand, especially for motor vehicles and consumer electronics.

As a result, prices for merchandise other than food and energy are increasing at the fastest rate since the early 1990s.

INFLATION OUTLOOK

U.S. central bank officials have said they believe the acceleration will prove temporary, with price increases slowing in 2022 and 2023.

But inflationary pressures normally intensify as a business cycle becomes longer and more capacity constraints emerge.

It would be unusual for inflation to slow as employment rises, manufacturing capacity becomes more fully utilized and service sector output increases.

The relationship between inflation and the business cycle is often obscured because the cycle is presented as if it exists in only two states: recession and expansion.

The two-state model is a simplification. In fact, the rate of growth is highly variable; recessions are only the most pronounced slowdowns.

The long boom between 1991 and 2001 was almost derailed by a sharp mid-cycle slowdown in 1998/99 caused by the East Asia financial crisis, Russian debt default and failure of the Long-Term Capital Management hedge fund.

The expansion between 2001 and 2007 lost momentum in its early stages and threatened to stall in 2002/2003, prompting the Federal Reserve to cut interest rates again to try to entrench the recovery.

During the expansion of 2009 to 2020, a similar early-recovery stall occurred between 2010 and 2012, prompting the Fed to launch further rounds of bond buying.

Later in the same expansion, there was an even more serious mid-cycle slowdown (in effect an undeclared recession) in 2015/16, which contributed to the populist revolt and election of Donald Trump as U.S. president.

Experience suggests inflationary pressures are only likely to abate if the recovery threatens to stall or enters a mid-cycle slowdown.

If the U.S. economy avoids both in 2022/23, inflation will accelerate further and necessitate a tightening of monetary policy earlier than the central bank has indicated.

(Editing by Catherine Evans)

Exclusive: Fed Chair Powell says won’t allow ‘substantial’ overshoot of inflation target – April 8 letter to U.S. senator

By Ann Saphir

(Reuters) – The U.S. economy is going to temporarily see “a little higher” inflation this year as the economy strengthens and supply constraints push up prices in some sectors, but the Federal Reserve is committed to keeping any overshoot within limits, Fed Chair Jerome Powell said in an April 8 letter.

“We do not seek inflation that substantially exceeds 2 percent, nor do we seek inflation above 2 percent for a prolonged period,” Powell told Senator Rick Scott in a five-page letter responding to a March 24 letter from the Florida Republican raising concerns about rising inflation and the Fed’s bond buying program. “I would emphasize, though, that we are fully committed to both legs of our dual mandate – maximum employment and stable prices.”

Scott, while not on the Senate Banking Committee that directly oversees the Fed, nonetheless has been a vocal critic of Powell. He has warned that the Fed’s low interest rates and bond-buying program will force prices higher, hurting families and businesses.

His office provided Powell’s letter to Reuters, and suggested the response did not allay the senator’s concerns.

“The data is clear that inflation is rising, and Chair Powell continues to ignore this growing problem,” Scott’s office told Reuters in the email. “Senator Scott remains concerned about the impact inflation will have on low and fixed-income American families, like his growing up. He is calling on Chair Powell to wake up to this threat, lay out a clear plan to address rising inflation and protect American families.”

Powell in his letter said that low inflation constrains the Fed’s ability to offset economic shocks with easy policy, and that after a decade of too-low inflation, the Fed is now aiming for inflation moderately above 2%.

“We understand well the lessons of the high inflation experience in the 1960s and 1970s, and the burdens that experience created for all Americans,” Powell said in the letter. “We do not anticipate inflation pressures of that type, but we have the tools to address such pressures if they do arise.”

(Reporting by Ann Saphir; Editing by Chizu Nomiyama and Dan Burns)

Pace of U.S. economic recovery accelerates, Fed says

By Jonnelle Marte, Ann Saphir and Howard Schneider

(Reuters) – The U.S. economic recovery accelerated to a moderate pace from late February to early April as consumers, buoyed by increased COVID-19 vaccinations and strong fiscal support, opened their wallets to spend more on travel and other items, the Federal Reserve said on Wednesday.

The labor market, which was decimated by the coronavirus pandemic, also improved as more people returned to work, with the pace of hiring picking up the most in the manufacturing, construction, and leisure and hospitality sectors.

“Reports on tourism were more upbeat, bolstered by a pickup in demand for leisure activities and travel which contacts attributed to spring break, an easing of pandemic-related restrictions, increased vaccinations, and recent stimulus payments among other factors,” the U.S. central bank said in its latest “Beige Book,” a collection of anecdotes about the economy from its 12 regional districts.

Hospitality contacts told the Atlanta Fed they had “solid bookings for the remainder of spring and through the summer months and beyond,” according to the report, which was compiled by the Dallas Fed using surveys conducted before April 5.

While most districts said the pace of growth in their regional economies was moderate, the New York Fed said its economy “grew at a strong pace for the first time during the pandemic, with growth broad-based across industries.”

The improvement occurred despite an increase in COVID-19 cases in the region, the New York Fed said. “Moreover, business contacts have grown increasingly optimistic about the near-term outlook.”

FOCUS ON WAGES

Fed Chair Jerome Powell said this week that the U.S. economy is at an “inflection point” where growth and hiring could pick up speed over the coming months thanks to increased COVID-19 vaccinations and strong fiscal stimulus.

The United States added 916,000 jobs in March, the largest gain in seven months, according to Labor Department data. And U.S. consumer prices rose at the fastest clip in more than 8-1/2 years in March as vaccinations and stimulus boosted economic activity, according to Labor Department data released on Tuesday.

However, Powell and other Fed officials say the brighter economic forecasts and brief period of higher inflation will not affect monetary policy, and the central bank will keep its support in place until the crisis is over. The U.S. economy is still 8.4 million jobs short of its pre-pandemic levels.

Policymakers agreed last month to leave interest rates near zero and to keep purchasing $120 billion a month in bonds until there was “substantial further progress” toward the Fed’s goals for maximum employment and inflation. Fed officials will gather again in two weeks for their next policy-setting meeting.

The report highlighted the strategies some businesses are considering as they reopen, increase capacity and attempt to recruit workers. One staffing services firm told the Cleveland Fed that pay had for the first time become the top priority of job seekers, surpassing the type of work.

Several workforce contacts suggested that employers might be delaying wage hikes in hopes of a surge of newly vaccinated job seekers, the Minneapolis Fed reported: “Why start raising wages when a lot of labor might be coming back?”

(Reporting by Jonnelle Marte; Editing by Paul Simao)

Cold weather chills U.S. retail sales, manufacturing production

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. retail sales fell more than expected in February amid bitterly cold weather across the country, but a rebound is likely as the government disburses another round of pandemic relief money to mostly lower- and middle-income households.

The harsh weather also took a bite out of production at factories last month as the deep freeze in Texas and other parts of the South put some petroleum refineries, petrochemical facilities and plastic resin plants out of commission.

The setback is probably temporary, with the strongest economic growth since 1984 anticipated this year, thanks to massive fiscal stimulus and an acceleration in the pace of vaccines, which should allow for broader economic re-engagement, even as new COVID-19 cases are starting to creep up.

Federal Reserve officials, who started a two-day meeting on Tuesday, are likely to focus on the underlying economic strength, expectations of higher inflation and a steadily recovering labor market.

“We knew the economy took a major hit in February due to the brutally cold weather and a lot of snow,” said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania. “No reason to panic over the February numbers, the economy is moving forward rapidly and it should pick up the pace as the latest stimulus payout hits home.”

Retail sales dropped by 3.0% last month, the Commerce Department said. But data for January was revised sharply up to show sales rebounding 7.6% instead of 5.3% as previously reported. Economists polled by Reuters had forecast retail sales falling only 0.5% in February.

Unseasonably cold weather gripped the country in February, with deadly snow storms lashing Texas. The decline in sales last month also reflected the fading boost from one-time $600 checks to households, which were part of nearly $900 billion in additional fiscal stimulus approved in late December, as well as delayed tax refunds.

The broad-based decrease was led by motor vehicles, with receipts at auto dealerships dropping 4.2%. Sales at clothing stores fell 2.8%. Consumers also slashed spending at restaurants and bars, leading to a 2.5% drop in receipts. Sales at restaurants and bars decreased 17% compared to February 2020.

Receipts at electronics and appliance stores dropped 1.9% and sales at furniture stores tumbled 3.8%. There were also big declines in sales at sporting goods, hobby, musical instrument and book stores. Receipts at food and beverage stores were unchanged. Sales at building material stores decreased 3.0%. Online retail sales plunged 5.4%.

Stocks on Wall Street were mixed. The dollar rose against a basket of currencies. Longer-dated U.S. Treasury prices fell.

TEMPORARY SETBACK

Excluding automobiles, gasoline, building materials and food services, retail sales decreased 3.5% last month after surging by an upwardly revised 8.7% in January. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. They were previously estimated to have shot up 6.0% in January.

President Joe Biden last week signed his $1.9 trillion rescue package into law, which will send additional $1,400 checks to households as well as extend a government-funded $300 weekly unemployment supplement through Sept. 6. Households have also accumulated $1.8 trillion in excess savings.

“This year, we expect the combination of an improved health situation and generous fiscal stimulus to fuel a consumer boom for the history books,” said Lydia Boussour, lead U.S. economist at Oxford Economics in New York.

Economists at Goldman Sachs on Saturday raised their first-quarter GDP growth estimate to a 6% annualized rate from a 5.5% pace, citing the latest stimulus from the Biden administration. The economy grew at a 4.1% rate in the fourth quarter.

Goldman Sachs forecast 7.0% growth this year. That would be the fastest growth since 1984 and would follow a 3.5% contraction last year, the worst performance in 74 years.

The rosy economic outlook was not dimmed by a separate report from the Fed on Tuesday showing output at factories tumbled 3.1% in February, also weighed down by a global semiconductor shortage because of the pandemic.

“While we expect these supply disruptions to be temporary, auto production could remain soft in the very near term,” said Veronica Clark, an economist at Citigroup in New York. “With substantial new fiscal stimulus to support demand for consumer goods in the coming months, supply disruptions could lead to rising prices.”

Indeed, supply constraints because of coronavirus-related restrictions are driving up commodity prices. A third report from the Labor Department showed import prices rose 1.3% last month after surging 1.4% in January. They jumped 3.0% on a year-on-year basis after rising 1.0% in January.

Though inflation is expected to accelerate as early as the first half of this year, many economists do not expect it to spiral out of control with millions of Americans unemployed. Supply chain bottlenecks are also expected to start easing as more people around the globe get vaccinated.

The dollar has also strengthened so far this year against the currencies of the United States’ main trade partners.

“There is still a great deal of unused industrial capacity in the U.S. economy. This will help keep inflation under control throughout this year,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania.

(Reporting by Lucia Mutikani; Editing by Dan Burns and Andrea Ricci)

Fed’s Powell says support for economy needed for ‘some time’

By Howard Schneider

WASHINGTON (Reuters) – The U.S. economic recovery remains “uneven and far from complete” and it will be “some time” before the Federal Reserve considers changing policies it adopted to help the country back to full employment, Fed Chair Jerome Powell said on Tuesday.

The U.S. central bank’s interest rate cuts and purchases of $120 billion in monthly government bonds “have materially eased financial conditions and are providing substantial support to the economy,” Powell said in remarks prepared for delivery to a Senate Banking Committee hearing on the state of the economy.

“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” the hurdle the Fed has set for discussing when it might be appropriate to pare back support.

While the health crisis in the country is improving and “ongoing vaccinations offer hope for a return to more normal conditions later this year,” Powell said, “the path of the economy continues to depend significantly on the course of the virus and the measures taken to control its spread.”

Powell’s appearance in Congress comes at a significant juncture for the U.S. economy, which is still reeling from the pandemic but perhaps poised to take off later this year if the vaccination program hits its stride.

The hearing before the Senate Banking Committee, one of the Fed chief’s mandated twice-a-year appearances on Capitol Hill, is Powell’s first since Democrats won the White House and control of both chambers of Congress.

After his opening remarks, Powell will field questions from senators who are likely to focus on the tension between a pandemic that has claimed more than half a million U.S. lives and left millions unemployed, and an economy flush with savings and central bank support, and about to get a fresh gusher of federal spending.

INFLATION DEBATE

The growing likelihood that Congress will pass President Joe Biden’s $1.9 trillion stimulus plan has raised concerns about a possible spike in inflation and overheating in asset markets, but Powell’s message to lawmakers will likely be a familiar one: don’t let off the gas.

Even with Americans being vaccinated at a rate of more than 1.5 million a day and coronavirus caseloads dropping, Powell and his fellow Fed policymakers are focused instead on the nearly 10 million jobs missing from the economy compared to a year ago, and the potent risks still posed by the virus.

They’ve pledged to keep interest rates low and use other monetary policy tools to speed up a labor market recovery. Two weeks ago, Powell pushed for a “society-wide commitment” to that goal – a nudge to lawmakers debating Biden’s stimulus plan.

The scale of the proposed stimulus, coming on the heels of about $4 trillion in federal aid and heavy bond purchases by the Fed last year, has flustered the feathers of inflation hawks and stoked criticism that the U.S. central bank has boosted prices of stocks and other assets to unsustainable levels.

Fed officials are united on that front. They don’t think inflation is a risk, and regard much of the recent rise in stock prices, for example, as a sign of markets’ confidence in a post-pandemic economic rebound, not an artificial run-up fueled by cheap money.

The hearing on Tuesday, which will be followed by Powell’s appearance before the House of Representatives Financial Services Committee on Wednesday, may also provide a gauge of his prospects of remaining Fed chief when his current four-year term expires early next year.

Biden will have to decide in coming months whether to reappoint Powell, who was chosen for the job by former President Donald Trump. The nomination is subject to Senate ratification.

(Reporting by Howard Schneider; Editing by Paul Simao)