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This past week, despite all of the posturing and finger pointing involving pay bonuses for AIG employees, the big story for the economy by far was the Fed’s FOMC announcement making public plans for extraordinarily aggressive easing—basically by running the printing presses at fever pitch and with innovative methods. There has been no lack of creativity on the part of the Fed. And the FOMC announcement clearly had huge impact on financial markets—boosting stocks, dropping Treasury yields, tanking the dollar, and sending oil higher.
 Equities have just pulled off two consecutive weekly gains—a feat not seen in a while. Boosting the markets this past week were unexpectedly strong housing starts on Tuesday and shockingly strong moves by the Fed in its FOMC statement on Wednesday. The Fed is engaging in likely an additional $1 trillion in its own monetary stimulus over what had already been announced. Also on Tuesday, Bank of America’s CEO Kenneth Lewis said the bank was profitable in the first two months of the year, sending financials up sharply. Stocks dipped on Friday on profit taking, on downgrades to GE earnings projections, and due to bank stocks being battered if they had taken TARP money. After this week’s Congressional bashing of financial firm bonuses—notably those by AIG—any financial firm that took TARP money is now seen as being not as competitive as those not taking the funds. Those not taking TARP firms are seen as being able to steal top talent from those who did because of government strings related to bonus payments. Nonetheless, it was a banner week for equities as optimism made at least a partial comeback in equities.
Equities were up this past week. The Dow was up 0.8 percent; the S&P 500, up 1.6 percent; the Nasdaq, up 1.8 percent; and the Russell 2000, up 1.8 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 17.1 percent; the S&P 500, down 14.9 percent; the Nasdaq, down 7.6 percent; and the Russell 2000, down 19.9 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 The big news for Treasuries this past week was the FOMC’s meeting announcement that the Fed will be buying long-term Treasuries. The central bank said it will buy as much as $300 billion in long-term Treasuries over the next six months. On the news Wednesday afternoon, Treasury yields on the 10-year and 30-year T-note and bond dropped sharply, plunging 50 and 29 basis points, respectively, for the day. Chatter was that the Fed will be focusing on intermediate maturities rather than the long bond.
Prices on Treasuries retreated on Thursday and Friday as traders saw Wednesday’s close as overbought on too much euphoria on the release of the FOMC statement. Also, traders reconsidered how effective the Fed’s plan will be in maintaining lower long term interest rates given the ballooning federal deficit—which keeps getting revised higher. But net for the week, Treasury yields were down notably—but especially for the 10-year note.
 For this past week Treasury rates were down as follows: the 2-year note, down 9 basis points; the 5-year note, down 22 basis points; the 10-year bond, down 25 basis points; and the 30-year bond, down 2 basis points. The 3-month T-bill edged up 1 basis point.
Most of the moves in rates this past week were for intermediate maturities as the near end was already near zero and the long end was being held captive to inflation fears and worries over building supply.
 This past week, crude oil prices rose net for the fifth consecutive week. Political instability in Nigeria bumped prices up at the start of the week. Thereafter, economic fundamentals took over, pushing prices up for most trading days. A jump in housing starts encouraged the view that demand will be rising in coming months. Although a unexpected rise in crude and gasoline stocks on Wednesday tapped prices down during the day, after-hours electronic trading after the Fed’s FOMC announcement boosted prices, carrying over to a surge in crude prices on Thursday. The Fed’s aggressive quantitative easing was seen as boosting the economy and oil prices in coming months. Also adding to oil’s price hike last week was a drop in the dollar and traders buying oil as an inflation hedge.
Net for the week, spot prices for West Texas Intermediate rose $4.81 per barrel to settle at $51.06 – putting oil at its highest since November 2008. Spot crude rose 10.4 percent net for the week.
The latest numbers from the manufacturing and housing sectors point to continued deep recession. However, the Fed is taking aggressive actions to limit the downturn and restore growth sooner than later. Unfortunately, there are signs that inflation has not gone away—possibly creating a policy quandary for the Fed later this year.
 The Fed gave the financial markets quite a shock this past Wednesday at the end of a two-day FOMC meeting. Yes, the FOMC held its target rate unchanged at zero percent to a quarter percent—no surprise there. But what did surprise the markets was the FOMC’s decision to expand its balance sheet so aggressively.
What stood out the most was the Fed’s decision to buy long-term Treasuries. Without a doubt, the Fed clearly is working to goose the economy beyond what can be done with essentially a zero fed funds rate. The Fed basically is printing money by expanding its balance sheets. And the printing presses are turning fast. The Fed plans to purchase up to $300 billion of long-term Treasuries over the next six months, double its agency debt purchases to $200 billion, and increase purchases of agency mortgage backed securities by $750 billion to $1.25 trillion.
The FOMC meeting statement said that the fed funds target range is expected to be unchanged for an "extended period." The vote on the statement was unanimous.
The Fed sees the need for further easing due to continued weakness in the economy. But the Fed does see monetary policy and fiscal stimulus leading to a resumption of economic growth.
Helping clear the way for further monetary expansion was the Fed's conclusion that inflation is under control for now.
"In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."
Additionally, this past week, the Fed finally came through with implementing the Term Asset-Backed Securities Loan Facility (TALF). The TALF is a funding facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by loans of various types to consumers and businesses of all sizes. Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. Last week, the Fed announced that it is expanding TALF to include four additional types of ABS: mortgage servicing advances, loans or leases relating to business equipment, leases of vehicle fleets, floorplan loans. The bottom line with TALF is that the Fed is putting a lot of energy and money into loosening credit in the non-depository institution portion of the credit markets.
 What’s the status of the Fed’s credit easing efforts so far' The Fed has so many new credit facilities that it is hard to quantify the impact of each. But some traditional measures of credit easing do give a picture of massive injections of liquidity by the Fed over the last six months. According to the latest money supply numbers, M2—a broad measure of money growth—had risen to a 9.8 percent year-ago growth rate for February. This was sharply higher than the recent cycle low of 3.4 percent seen in May 2005.
 However, growth in recent months has been even more rapid. On a 3-month ago annualized percent basis, M2 growth was 16.1 percent in February.
But the Fed has created the potential for even more robust money supply growth. The monetary base is what creates the potential for depository institutions to boost money supply. The monetary base consists of total reserves plus the currency component of the money stock plus some other items. The year-ago change in the monetary base for February was 88.1 percent! The problem is that financial institutions are holding onto cash to boost capital. But when losses ease, banks and other financial institutions are going to be in position to lend heavily—if they are willing to take the risks. Because there is such a disconnect between the monetary base, money supply, and actual lending, it is important for the Fed and the Treasury to create an environment conducive to lending. And this likely means buying up toxic assets. Nonetheless, that latest Fed plans to buy long-term Treasuries and boost credit facilities will add even more to the liquidity injections already in the pipeline.
The bottom line is that the Fed’s latest actions are quite aggressive for restoring health to the credit markets. This is going to take time. But markets should take heart that the plans are in motion—there has been no lack of implementation on the Fed’s part, at least not since early 2008.
 Housing starts in February made a significant comeback but it likely was mostly a technical rebound after January's very low number. Starts jumped 22.2 percent, following a 14.5 percent drop in January. The February pace of 0.583 million units annualized was down 47.3 percent year-on-year. The improvement in starts was led by the multifamily component which made an 82.3 percent monthly surge while the single-family component edged up 1.1 percent.
Looking beyond percent changes, the vast bulk of improvement was in the South—due to its larger baseline. Multifamily starts for the U.S. jumped by 106,000 in February with 72,000 coming from the South. For January, U.S. multifamily started had fallen by 40,000 with the South dropping 25,000. Basically, it strongly appears that worse-than-average weather in January in the South contributed to the decline in January and better-than-average weather boosted starts in February. Also, despite its small base, the Northeast contributed a 29,000 boost in multifamily starts for the latest month.
Incidentally, a big corroborating piece of information about the weather effects on housing is seen in the utilities component of industrial production. Look for that coming up.
The bottom line is that the multifamily component is volatile and so are winter months due to large seasonal factors and seasonal weather assumptions may or may not be met any given month. So, January likely was not as weak as the official numbers and February likely not as strong. While some fundamentals for housing are good (affordability), other factors still weigh on new construction—notably huge inventories of unsold homes. Housing starts are likely to bump along the bottom for some time until inventories are worked off.
 Overall industrial production posted its fourth consecutive decline, and 11 out of the last 13 months. In the latest month, there were two key temporary factors that distorted the overall number and the manufacturing component. Overall industrial production dropped 1.4 percent in February, following a 1.9 percent fall in January.
But the headline number for February was pulled down heavily by a massive 7.7 percent drop in utilities output. According to the Fed, “a swing to above-average temperatures contributed to a 7.7 percent drop in the output of utilities,”—sharply curtailing electricity and natural gas production.
The manufacturing component fell only 0.7 percent after a 2.7 percent drop in January. But manufacturing was bolstered by the return of auto assemblies. Motor vehicles and parts jumped 10.2 percent. Manufacturing excluding motor vehicles declined 1.2 percent in the latest month. Outside of autos, manufacturing saw widespread weakness.
Despite some temporary factors for February production, the industrial sector clearly is still in decline—fundaments are not good overall. Domestic demand is still retrenching and exports are in decline due to recession overseas. The dollar has fallen recently but it is way too early for any positive impact on manufacturing from that—given the lead times for the dollar to impact orders. Despite the boost from autos in February, that was essentially a one-time event and until consumers regain confidence in domestic manufacturers, the auto sector is not going to be helping manufacturing. Finally, there is no housing-related help for manufacturing in sight for some time either. You can expect output for appliances, furniture, carpeting, and related products to languish for coming quarters.
 The latest CPI report was a warning of rising upside risk for inflation. Consumer price inflation is no longer getting help from declining oil prices. In fact, oil prices have been firming and, while no surge is expected soon, oil prices are more likely to add to headline inflation in coming months than not. In February, the headline CPI rose 0.4 percent in February, following a 0.3 percent boost the month before. Meanwhile, core CPI inflation came in at 0.2 percent, unchanged from January and matching the consensus.
 Year-on-year, headline inflation firmed to up 0.1 percent (seasonally adjusted) in February from down 0.2 percent in January. Meanwhile, the core is up 1.8 percent, compared to 1.7 percent in January.
The risks of higher inflation have jumped lately regardless of what the Fed said in its FOMC minutes. The Fed has stated that it expects inflation to remain subdued in coming months. But if a declining dollar boosts oil prices along with expectations of recovery, then the wish for subdued inflation may be just that. Oil prices are extraordinarily low and the only real direction possible is up. Even though the recession is keeping core prices on the soft side, the upside risks for overall inflation probably are higher than many are talking. Just as headline inflation swooned in late 2008 over plummeting oil prices, headline inflation is at risk from rising oil prices as the economy heads into recovery. The Fed is going to have a hard time maintaining low inflation if oil prices resume an upward trend that is even a significant portion of that in late 2007 and early 2008.
 In contrast to the CPI, the producer price index in February rose but at a slower pace. The overall PPI rose 0.1 percent, following a 0.8 percent boost in January. Meanwhile, the core PPI rate eased to 0.2 percent rise after a 0.4 percent increase the prior month. For the headline number, the slowing was primarily due to a 1.6 percent drop in food prices. Energy increased 1.3 percent after a 3.7 percent boost in January.
For the overall PPI, the year-on-year rate eased to minus 1.6 percent in February from down 1.3 percent the month before.
 While the overall PPI looks tame, that may not be the case for the consumer once the volatile components and capital equipment are taken out. The index for finished consumer goods other than foods and energy jumped 0.4 percent in February after advancing 0.3 percent in January. On a year-ago basis, prices for finished consumer goods excluding food and energy were up 4.1 percent in February—hardly what one can call tame. This series closely tracks the overall core rate.
 The Fed’s massive liquidity injections could not keep the index of leading indicators in positive territory in February. The Conference Board's index of leading indicators sank 0.4 percent in February after a 0.1 percent gain in January. The biggest negatives in February were jobless claims, which continue to erode, and stock prices, which may now be recovering. Money supply was not a factor in February, as it paused to near flat growth, after earlier surges.
The biggest positive was a curiosity. The spread between the 10-year note and fed funds rate widened and was the biggest positive factor as it is assumed that the spread widened due to the Fed cutting short-term interest rates. This time the spread widened because the 10-year T-note yield was rising over inflation concerns and over supply issues with the Federal budget deficit balloon. So, in reality, this time the widening spread was a negative for the economy but a positive for the leading index.
The coincident index fell 0.4 percent in February, following a 0.6 percent decline the prior month.
Looking ahead, we will see a rebound in stock prices for March and a narrowing of the 10-year T-note and fed funds due to the Fed’s buying long Treasuries. The bottom line is that most components of the leading index are going to be flat to slightly negative for some time.
The first quarter is not looking pretty in any sector. Manufacturing and housing remain quite depressed. Rising oil prices are threatening to heat inflation back up. But for now, the Fed is focusing on pumping up the economy. Given the extraordinary magnitude of the Fed’s plans, the Fed is likely to succeed. Although monetary stimulus is clearly in the pipeline, we can still expect some bumpy months during most if not the rest of 2009. But by year end, one might even be questioning the wisdom and need for fiscal stimulus.
This coming week, we get another update on manufacturing with the durable goods report. The fourth quarter is essentially put to rest in the books with final revisions to GDP. And we get a status report on the health of the consumer sector with the personal income report.
Existing home sales posted a 5.3 percent drop in January to a 4.490 million annual unit rate. January’s pace was a record low for this series going back to January 1999. Supply on the market remains extremely elevated at 9.6 months compared to 9.4 months in December.
Weakness in sales is carrying over to prices as the median price of an existing home fell 3.1 percent in January to $170,300 for a 14.8 percent year-on-year decline. Whether sales are at bottom yet, the early indications are mixed. The Mortgage Bankers Association recently reported a rise in mortgage applications. But the pending home sales index fell a sharp 7.7 percent in January pointing to weak home sales data for February and March.
Existing home sales Consensus Forecast for February 09: 4.50 million-unit rate
Range: 4.37 to 4.68 million-unit rate
Durable goods orders in January plunged 4.5 percent (revised), following a 4.6 percent drop in December. Excluding the transportation component, new orders declined 3.0 percent, after dropping 5.7 percent in December. By industry group, the largest decline was in transportation, led by a fall in defense aircraft orders along with a decline in motor vehicles. Early indications for March are not good. For both the Philly and New York Fed manufacturing reports, the new orders index fell in both February and March. Both surveys have data for a given reference month that overlaps two actual months (the March report includes data from both late February and early March).
New orders for durable goods Consensus Forecast for February 09: -2.0 percent
Range: -3.0 percent to +1.0 percent
New home sales in January plunged a monthly 10.2 percent to a record low pace of 309,000 annualized units sold. Prices for new homes also continued to decline under the weight of excess supply and little traffic. The median price for a new home fell a very steep 9.9 percent in January to $201,100, pulling down the year-on-year rate to minus 13.5 percent. The supply of new homes on the market jumped to 13.3 months from 12.2 months in December. Looking ahead, lower mortgage rates may help slow the fall in sales. But homebuyer traffic in January and February was very low, according to the National Association of Homebuilders.
New home sales Consensus Forecast for February 09: 315 thousand-unit annual rate
Range: 290 thousand to 340 thousand-unit annual rate
GDP growth was revised down significantly at the end of February with the Commerce Department’s first revision to fourth quarter GDP. Growth was revised to a 6.2 percent decline from the initial estimate of a 3.8 percent drop. The downward revision was primarily due to a sharply lower estimate for inventories and for exports. Turning to inflation, the GDP price index was revised up to plus 0.5 percent annualized from the initial estimate of a 0.1 percent dip.
Real GDP Consensus Forecast for final Q4 08: -6.6 percent annual rate
Range: -6.9 to -6.2 percent annual rate
GDP price index Consensus Forecast for final Q4 08: +0.5 percent annual rate
Range: +0.5 to +0.5 percent annual rate
Initial jobless claims slipped in the latest week but that was not the big story. Continuing jobless claims for the March 7 week rose a very steep 185,000 to a record 5.473 million. The worsening recession is making it harder for the jobless to find new work. Initial claims for the March 14 week did fall back 12,000 but remained at a very high 646,000 for a four-week average of 654,750. Lackluster demand in the economy is likely to result in rising layoffs for some time.
Jobless Claims Consensus Forecast for 3/14/09: 650,000
Range: 640,000 to 670,000
Personal income in January rose 0.4 percent, following a 0.2 percent decline in December. But special factors, including January pay raises for federal civilian and military personnel, boosted personal income. Excluding special factors, personal income rose 0.2 percent in January. The important wages and salaries component actually declined 0.2 percent after a 0.4 percent fall in December. Consumer spending rebounded 0.6 percent in January after a 1.0 percent drop the previous month. The headline PCE price index rose 0.2 percent in January while the core index edged up only 0.1 percent. Looking ahead, personal income for February is likely to be negative, coming off the special factors for January and reflecting further job losses. Outside of durables, spending should be up. Retail sales excluding autos and gasoline were up in February. But unit new motor vehicle sales slid further in the month. PCE price inflation is likely to firm given that the headline CPI jumped 0.4 percent for February while the core CPI edged up to 0.2 percent.
Personal income Consensus Forecast for February 09: -0.2 percent
Range: -0.7 to 0.0 percent
Personal consumption expenditures Consensus Forecast for February 09: +0.3 percent
Range: -0.1 to +0.5 percent
Core PCE price index Consensus Forecast for February 09, m/m: +0.2 percent
Range: 0.0 to +0.3 percent
The Reuter's/University of Michigan's Consumer sentiment index edged 3 tenths higher in mid-March to a still severely low level of 56.6. But expectations, the report's leading component, did rise 2-1/2 points to 53.0 -- indicating that pessimism isn't getting worse and perhaps hinting that it may now be slowly receding. On the downside, though, the current conditions component fell more than 3 points to 62.3, a reflection of ongoing and very severe contraction in the labor market. Looking ahead, the current conditions component is likely to remain low due to lagging weakness in labor markets. However, improvement in the expectations component likely is going to depend on how well the cheer leading is going from the Fed, the Treasury, and President Obama.
Consumer sentiment Consensus Forecast for final March 09: 56.7
Range: 55.0 to 60.0
Econoday Senior Writer Mark Pender contributed to this article.
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