Thursday, September 28, 2023 5:05 am

Pollack: The fed X-factor

The Monday Morning Quarterback
A quick analysis of important economic data released over the last week

What Will the Fed Do Next?

The next Federal Open Market Committee meeting is set for September 19th and 20th. While many market watchers are hoping for a pause in rate increases, the Fed’s hawkish tone to the minutes of its July meeting is affecting the stock market and sending 10-year Treasury rates to their highest yield in two decades. The FOMC members’ previous forecast suggests that the Fed Funds rate will finish at 5.6% for 2023. That signaled to many that the July rate hike to a range of 5.25% to 5.50% might be the last.

The minutes of the last meeting show that there are sharper divisions among Fed officials than at previous meetings. Most still see a significant upside risk to inflation which could require further tightening of monetary policy. Others are advocating leaving the rates unchanged, citing potential damage to the economy and jobs if rates are increased further. By comparison, the Fed’s staff has raised the odds of a soft landing and issued a new forecast predicting no recession this year.

Some of the hawks on the Committee believe that even with a string of good inflation reports, strong GDP growth, and low unemployment, inflation could rebound. They want to reduce inflation now and pivot quickly to a looser monetary policy if they need to minimize damage. The Fed doves believe they are closer to the goal of a 2% inflation rate and therefore a pause is appropriate. The CPI data for July showed prices up 3.2% overall and 4.1% for the core rate excluding food and energy. However, that is a year-over-year reading. Comparatively, the month-over-month reading from June to July was much lower at an annualized rate of 2.0% and a core rise of just 1.9%. For the Fed doves, this indicates the Fed is doing its job.

The next release of CPI data will occur on September 13, a few days before the FOMC meeting. That reading may impact the Fed’s next steps to increase rates or pause for the time being.

U.S. Snapshot:

  • Despite recent economic news, the Conference Board Leading Economic Index continues to head in the wrong direction. The LEI declined for the 16th consecutive month signaling uncertain times for the economy in the months to come. The Coincident Economic Index (which measures the current performance of the economy) grew albeit slowly in July.
  • U.S. retail sales grew above expectations in July as more consumers purchased online and dined out. Retail sales were up 0.7% for the month and 3.2% for the year. Strong consumer spending points to growth in the third quarter.
  • The manufacturing sector saw some growth in July. Industrial production increased 1.0% for the month following a 0.8% drop in June.
  • July showed a glimpse of how the housing market continues to adjust to the Fed’s rate hike.
  • Mortgage rates increased above 7% for the first-time last week since November. The 30-year mortgage rate was 7.09% up from 6.81% at the end of July. Higher rates and low existing inventory reduce affordability.
  • The NAHB’s Housing Market Index declined six points to 50. The new home market continues to face the problems of the cost and shortage of labor, the shortage of finished lots, and higher financing costs. This contributed to slower consumer demand bringing builders’ confidence down.
  • Housing permits increased 0.1% to a seasonally adjusted annual rate (SAAR) of 1.442 million in July. Single family permits saw an increase of 0.6%. The number of total housing starts was up 3.9% to a SAAR of 1.452 million with single family units increasing 6.7% for the month.

Arizona Snapshot:

  • Total taxable sales in Arizona were down 2.2% in June bringing the fiscal year growth to 3.6%. Maricopa similarly saw a decline of 2.7% for the month and 3.0% growth for the fiscal year.
  • According to July data, permits and new home closings appear to be at or close to balance.
  • In Greater Phoenix, both permits and new home closings were over 1,700 in July. Greater Tucson saw a similar story with both permits and closings surpassing 300.
  • The recent mortgage rate increase has eroded affordability even further. The median sales price for existing homes in Greater Phoenix declined 2.3% for the month to $425,000 as the number of existing homes sold fell nearly 18%. Greater Tucson saw similar monthly declines of 3.5% and 21.4% in existing median sales price and existing homes sold, respectively.
  • New home builders can offer different incentives to maintain or increase foot traffic at their new developments. The resale market is a different story. As inflation and interest rates come down, mortgage rates will follow, and it will become more feasible for homeowners with a low mortgage to choose to sell their current home. Once more homes become available combined with lower mortgage rates, affordability may move in a positive direction for buyers.
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August 2023