The minutes to the September Federal Open Market Committee (FOMC) meeting reveal deep divisions within the Federal Reserve regarding views on the persistence of low inflation and the pace of interest rate hikes. The Fed is still expected to raise short-term rates one last time this year in December despite pushback from doves. Significant doubts remain, however, about the Fed’s model
Posts tagged Interest Rates
Harvey Effects Seep into Data
Personal incomes and consumer spending both contracted by 0.1%, after adjusting for inflation in August. Increases in consumer spending were largely in health care.
Effects of Hurricane Harvey, which hit landfall on August 25, had a minor impact on the data. We will see larger disruptions from Harvey and Hurricane Irma in the reports for September.
The devastation and humanitarian crisis triggered by Hurricane Maria will show up on the margins because data for Puerto Rico are not included in the national data. Ripple effects will show up initially as a blow to tourism from trips cancelled to the island. We will have to absorb the economic costs associated with the likely migration of survivors to the mainland.
Federal Open Market Committee (FOMC) members signaled a December rate hike with the release of the consensus in their updated forecasts. In addition, the FOMC made the widely expected announcement to begin shrinking the Fed’s massive balance sheet in October, along with the statement on the outlook for monetary policy.
When members of the Federal Open Market Committee (FOMC) meet this week, it will be the last meeting attended by Vice Chair Stanley Fischer who announced he will retire early, effective mid-October. Fischer has been a moderating influence and worried more openly than his colleagues about risks to financial markets form running rates too low for too long. He may use his last opportunity as a voting member of the FOMC to raise these issues again.
Look for the following to be highlighted in the FOMC statement:
Stanley Fischer surprised markets by announcing that he will resign his position as Vice Chair of the Federal Reserve Board of Governors as of October 13; that is more than eight months before his term expires in June 2018 and intensifies the need for the White House to make a decision regarding the fate of current Fed Chair Janet Yellen, sooner rather than later. Read More »
The consumer price index (CPI) rose just 0.1% in for both the overall and core (nonfood and ex-energy) measures of inflation between June and July. The overall index rose 1.7% from one year ago, up a 0.10% from the 1.6% year-over-year pace the month prior, while the core CPI held at a 1.7% year-over-year pace for the third month in a row.
The stability of the pace of core inflation will provide some reassurance for the Federal Open Market Committee (FOMC) that the drag on prices we saw earlier this year is beginning to level off.
Rates Steady, Taper Planned for September
The Federal Open Market Committee (FOMC) members voted unanimously to move to the sidelines on rate hikes while simultaneously affirming their commitment to begin reducing the Federal Reserve’s massive balance sheet, starting as soon as September. The statement took on a much more dovish tone on inflation than we have seen since the beginning of the year. This indicates a capitulation to doves on the FOMC, including Governor Lael Brainard, who are not convinced that the slowdown in both wages and inflation is transitory.
The Federal Reserve is expected to move back to the sidelines on rate hikes at the policy meeting this week. Speed bumps in inflation and wage gains are slowing the pace of normalizing interest rates. Fed Chair Janet Yellen is still convinced that the slowdown is transitory, but cannot risk being wrong at this late point in her tenure.
The number of housing starts in June jumped to a higher-than-expected 1.21 million-unit, annualized rate following upward revisions to the May data. The revisions were mostly in the multifamily market and coming from a lower base than we saw earlier in the cycle. Multifamily starts are still running 20% below the peak hit in December 2016 despite the June increase and upward revisions to May. Overbuilding in luxury apartments in some of the largest cities has become a hurdle for new, multifamily projects; rents are starting to slacken, which is good news for debt-laden millennials starting their first jobs but bad news for all the builders with projects about to come on line. Chicago alone had roughly 8,000 new units scheduled to come online in 2017 and 2018 at the start of this year. Read More »
Retail sales fell 0.2% in June, much weaker than expected. A sharp drop in prices at the gas pump accounted for a disproportionate amount of that drop. Core retail sales, which more closely track consumer demand, also fell. Heavy discounting played a key role in holding down sales totals.
The restructuring in the retail sector, with a new wave of store closings, was evident in the retail sales report. Department store sales dropped 0.7% from May, and were down nearly 4% from a year ago. Those losses were more than offset by a surge in spending at big-box discounters who are pushing hard to regain ground lost to Amazon.