MarketView for February 16

Producer Price Index Rises

Core wholesale prices rose in January at their fastest rate in more than two years, raising some inflation concerns. According to Wednesday’s report by the Labor Department, the core producer price index, this excludes food and energy costs, increased 0.5 percent, the largest advance since October 2008. The rise in core PPI reflected an increase in drug prices, which accounted for 40 percent of the increase.

The rise in core PPI comes at a time when a surge in commodity prices has caused many economies to raise red flags on inflation. Yet, the Fed has so far shown little concern over price pressures and officials have repeatedly said core consumer inflation remains too low. The central bank is widely expected to complete its planned purchases of $600 billion in government bonds to assist the recovery.

Minutes of the Fed's January 25-26 policy meeting released on Wednesday showed officials expected inflation to stay subdued and "measures of core inflation would remain close to current levels in coming quarters.

The government is expected to report on Thursday that core consumer prices rose 0.1 percent in January from December.

Companies such as Coca-Cola, PepsiCo, Kraft and Procter & Gamble are raising prices of some goods to offset the high energy and commodity costs. However, it is questionable whether price increases by producers will stick.

A separate report from the Fed showed industrial production slipped 0.1 percent in January, the first decline since June 2009, after rising 1.2 percent in December. Capacity utilization, a measure of how fully firms are using their resources, dipped to 76.1 percent from an upwardly revised 76.2 percent.

Concern over the decline in industrial production is minimal as a return to more normal winter temperatures caused a sharp fall in utility output. Mining production also fell, but factory activity increased.

While the rest of the economy has been strengthening, recovery continues to elude the housing market. Housing starts jumped 14.6 percent to a seasonally adjusted annual rate of 596,000 units in January, but permits for future building fell 10.4 percent, the Commerce Department reported on Wednesday. In addition, the rise in starts reflected a pickup in groundbreaking for multifamily units. Starts fell in the more-stable single-family home category

An independent survey on Tuesday indicated that sentiment among home builders hovering near all-time lows in February.

Fed’s Confidence Rises

Federal Reserve officials raised their forecasts for economic growth last month but remained unhappy with the job market's recovery. Minutes of the Fed's January 25-26 policy session released on Wednesday suggested the consensus was still firmly aligned with completing the planned purchase of $600 billion in government bonds. A few Fed members questioned whether continued stronger data would call for curtailing the program.

Officials believed downside risks to the recovery were dissipating and there was no mention of a potential extension of the bond purchase plan, the minutes showed. "Participants generally expressed greater confidence that the economic recovery would be sustained," the minutes stated.

Despite that rosier assessment, policymakers expected only slow progress reducing unemployment and some said it was unlikely the recovery would strengthen so significantly that it would warrant curbing the bond buying plan.

"Overall, meeting participants continued to express disappointment in both the pace of and the unevenness of the improvements in labor markets," the minutes said.

Fed officials raised their 2011 growth forecast to a range of 3.4 percent to 3.9 percent from their November projection of 3 percent to 3.6 percent, although projections for 2012 and 2013 were little changed. The Fed also made only minor changes to forecasts for unemployment and inflation.

The U.S. jobless rate was projected to be in a range of 8.8 percent to 9 percent in the fourth quarter of this year, with unemployment declining only gradually over the Fed's three-year forecast horizon. In November, the Fed expected the unemployment rate to be in an 8.9 percent to 9.1 percent range.

Government data released after the Fed's January meeting showed unemployment dropped to 9 percent that month, putting the jobless rate already at the upper point of the Fed's forecast for the last three months of the year.

The Fed's 2011 forecast range for inflation moved only at the low end, shifting to 1.3 percent to 1.7 percent from the 1.1 percent to 1.7 percent anticipated in November.

Commodity price increases around the world have stirred inflation fears and prompted accusations the Fed is behind the inflation curve. Fed Chairman Ben Bernanke is likely to face questions about the Fed's easy money policies at a meeting of top finance officials from the Group of 20 leading economies in Paris this weekend. Some emerging market nations have blamed the Fed for fueling a global inflation that is harming their economies.

The Fed minutes showed some policymakers saw the rise in energy and other commodity prices as a risk, but most officials believed high unemployment would likely keep inflation, which is below the Fed's preferred range of just under 2 percent, well in check.

In a statement it issued at the conclusion of its January meeting, the Fed noted the brighter outlook for the economy. By unanimous vote, policymakers agreed to remain on course with their plan to buy longer-term Treasury securities to raise economic growth.

The minutes showed some policymakers were uncertain about the impact the bond buying program would have on the economy, but believed it was best to follow through with plans already laid, according to the minutes.

Others said that if growth picked up more strongly than expected, the central bank should consider curtailing the program. Richmond Fed President Jeffrey Lacker has made that suggestion publicly in speeches since the meeting.