Fed minutes may give hint on March hike

Since Federal Reserve Chair Janet Yellen told Congress last week that a March interest rate hike is at least on the table, the search is on for clues as to whether the Fed is likely to make a move that soon. Minutes of the Fed’s early February meeting, out this week, will be Exhibit A. A light week of economic news also features reports on new and existing home sales.

Although Yellen didn’t tip her hand in testimony before the Senate banking committee, she did say that “every meeting is live,” including the Fed’s next gathering March 14-15. Investors remain complacent, with fed fund futures giving just 17% odds of a rate increase in March and 47% in June. But some encouraging economic data last week increased the chances of Fed action, economists say, including strong pickups in inflation and retail sales. The Fed raised its benchmark short-term rate in December for the first time in a year. Minutes of the Jan. 31-Feb 1 meeting, out Wednesday, could signal if another move is imminent.

Yellen: March rate hike is on the table

Many economists also expect the meeting summary to reveal a discussion among Fed policymakers about when to start shrinking the Fed’s bloated balance sheet. During and after the financial crisis, the Fed bought more than $3 trillion in Treasury bonds and mortgage-backed securities to push down long-term interest rates. Now that the economy is healthy enough to begin raising short-term rates, some Fed policymakers believe the next step is to shrink the Fed’s holdings, though Yellen last week gave no hint that’s coming soon.

Rising interest rates could modestly restrain a housing market that has been one of the economy’s bright spots. But while existing home sales hit a post-recession high last year, limited inventories have tempered the gains. In December, home sales fell 2.8% amid a 3.6-month supply of homes, lowest since 2005, Nomura economist Lewis Alexander says. A six-month stockpile is considered balanced. Yet noting that pending home sales and mortgage applications have been solid recently, Alexander expects a rebound in home sales for January. Economists expect the National Association of Realtors to report a 1.1% rise in sales in January to a seasonally adjusted annual rate of 5.6 million.

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One reason existing home supplies have been skimpy is the inadequate construction of new homes, partly because of a labor shortage. In December, new home sales fell 10.4%. Yet Alexander points out that homebuilder sentiment remains high and the market is due for a bounce back. Economists expect the Commerce Department on Friday to report a 7.3% increase in new home sales last month to a seasonally adjusted annual rate of 575,000.