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Federal Reserve Chair Jerome Powell concluded his long-awaited speech on a poetic note, summing up the Fed's position. The committee is “navigating under the stars in cloudy skies.” Powell’s speech at the central bank’s annual Jackson Hole Symposium was less hawkish than the financial markets anticipated, while still implying the Fed is not finished with higher interest rates. As expected, the chair acknowledged the progress made thus far in bringing down inflation, but said the rate still remains too high. Two months of good inflation data is “only beginning to build confidence,” according to Powell, while he warned, “we can’t yet know the extent to which these lower readings will continue.” Bringing inflation lower requires below trend economic growth and softer labor conditions, neither of which are happening at this time.
The chair acknowledged the lag effects of higher rates on housing and the labor market. Job openings are beginning to trend lower but remain too high. Powell focused on three inflation indicators the committee is watching: goods, housing and services non-housing. Core goods prices have fallen in the past year but are well above a sustainable level. The effects of higher rates were felt almost immediately in the housing market, but continued demand is keeping prices too high. Services inflation took longer to be impacted by high rates and has only begun to show progress in the past three months. The Fed is committed to restoring inflation to 2% in an environment full of uncertainty. It doesn’t want to overtighten but also does not want to undershoot and risk inflation moving higher. Powell made it clear that they plan to keep rates high “until the job is done.”
Key Indicators this Week
Housing – The divide in housing market activity continues to widen between new and existing homes. Sales of existing homes fell 2.2% in July compared to a 4.4% increase of new home sales. The inventory of existing homes for sale, while marginally higher for the month, is down 15% from a year ago. The number of new homes for sale, on the other hand, is down just 5%. The lack of inventory of previously owned homes is pushing home buyers to the new home market, which is, in turn, pushing up prices. The median price of a new home is not only rising faster than a previously owned home (5% versus 1.9% from 2022) but it is also 7% higher. With mortgage rates nearing 8%, homebuyers are left with little extra money to fix up an existing home, making the higher new-home price more economical.
Durable Goods – The July durable goods order report was a good reminder to always check under the hood before making a prognosis. The headline data revealed orders fell 5.2%, the largest drop since April 2020. However, when you strip out volatile transportation orders, the balance was up 0.5%. Aircraft orders, the biggest contributor to the transportation component, fell 43.6% after two months of high double-digit gains. Motor vehicle orders and parts rose 0.8%, a sharp rebound from the 0.2% decline in June. Business orders were up 0.1%, also a rebound from the previous month's drop, but at the same time reflected hesitancy from companies to commit to long-term investments. This comes after second quarter business equipment spending had the best quarter in more than a year.
Note: Behind the Numbers will not be published next week. The report will resume on September 6 with the Monthly Overview and Data Report.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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