Despite low interest rates, inflation remains well in check. New residential construction declined, and industrial production growth slowed.

Federal Open Market Committee Monetary Policy
At its latest meeting, the Federal Open Market Committee kept the federal funds rate at a range between 0% and 0.25% and is expected to keep it there for some time. The Fed noted that the economy continued its improvement due to strengthening household spending and business investment in equipment and software. However, the Fed noted that a weak labor market, slow income growth, decreased housing values, and restricted credit continue to hold back a more robust recovery. The Fed maintained that it will end its purchase of agency debt and Treasury securities, additional signs that the economy is recovering.

Consumer Price Index
The Consumer Price Index (CPI) was unchanged in February after gaining 0.2% in January. The top-line CPI is 2.2% higher than in February 2009. The price index for energy shrank 0.5% in February but is 14.9% above its February 2009 level. Food prices rose 0.1%, but are off 0.1% compared to one year ago. Core prices, which exclude food and energy, rose by 0.1% in February. On a year-ago basis, the core CPI increased 1.3%. Prices remains in check despite loose monetary policy, as consumers and businesses remain spooked by the recession. Their reluctance to spend will keep demand low, especially as the labor market struggles to recover, and has led to some speculation that deflation could emerge.

New Residential Construction
The Census Bureau reported that new residential construction decreased by 5.9% in February. Housing starts in February were at a seasonally adjusted annual rate of 575,000. Year over year, housing starts are up only 0.2%. Permits for new housing fell to 612,000 in February from January’s 622,000. Until the labor market improves, new residential construction will not experience robust growth.

Industrial Production
Industrial production rose 0.1% in February, after posting a 0.9% increase in January. Severe winter weather throughout much of the country probably hampered February’s output. Components measuring mining and utility output posted gains of 2.0% and 0.5%, respectively. The manufacturing component fell 0.2%. Capacity utilization inched upward, rising to 72.7% from 72.5% in January. Driven by incremental increases in demand, industrial production should grow going forward.