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The key takeaway from this week’s FOMC meeting, aside from the decision to keep the fed funds rate at the current range of 5.25% - 5.50%, was the Fed’s plan to proceed carefully. These words were repeated numerous times during Federal Reserve Chair Jerome Powell’s press conference. This indicates the Fed’s course of action from here. Powell and company appear to be happy with the progress the Fed has made in bringing down inflation and believe they now have the luxury, or maybe the need, for proceeding more carefully in a “wait and see” stance.
As straightforward as the rate decision seemed, the Summary of Economic Projections (SEP) left many economists scratching their heads. The changes in the median projections from the previous SEP suggest the economy will be stronger next year than was projected three months ago (1.5% versus 1.1%) and the peak unemployment rate will be lower (4.1% versus 4.5%), but the fed funds will be higher (5.1% versus 4.6%). The updated “dot plot” took away 50 basis points of rate cuts from 2024. Powell has repeatedly said bringing inflation down would require below trend growth, but the Fed’s forecast and data point to the opposite – the economy has remained vibrant even as inflation has fallen. By the looks of it, the Fed seems to be concerned that economic strength could push inflation higher, which is why the Fed is being very careful now, holding interest rates steady at higher levels for longer. The Fed wants to keep its options open for another rate increase just in case core inflation spikes again.
The financial markets reacted stronger than expected after the chair spoke, pushing Treasury yields to the highest levels since 2007 and stock prices lower. Investors and traders fear the Fed has already gone too far with its restrictive policy and runs the risk of causing a recession. Even with the hawkish pause orchestrated at this meeting, the language following the decision was akin to implementing a hike in the minds of investment traders and investors. The market is once again doing the work for the Fed by pushing yields higher. Twelve of the 19 central bank officials signaled a rate hike before the year is over.
Key Indicators this Week
Housing – August took away any glimmers of hope that were hinted at in July for the housing market. Sales of existing homes fell 0.7%, the sixth out of eight monthly declines this year. The number of homes sold was the least amount since January. Higher interest rates and lack of inventory continue to create hurdles for homebuyers. The median price of previously-owned homes is up almost 4% from a year ago and up 46% from 2019. First-time homebuyers accounted for 29% of sales, much lower than the historical average of 40%.
The market is not much better for new home construction. Housing starts fell 11.3% in August to the lowest level in over three years. While the large drop was led by a 26.3% decline in multi-family homes, single-family starts were down 4.3%. Demand is strong, but waning, due to rising mortgage rates. Homebuilder sentiment fell to a five-month low. Builders are once again offering incentives and lowering prices to try to bring in contracts. The one saving grace is that permits for new construction, a sign of future activity, rose 6.9%. Again, most of that was for multi-family homes as higher prices and rates continue to push buyers out of the single-family home market. A report on new home sales will be released next week.
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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