Morning Report: Jerome Powell explains the Fed’s thinking

Vital Statistics:

Stocks are higher on positive news on the the trade front. Bonds and MBS are flat.

Durable goods orders came in lower than expected in May, and April was revised downward. The headline number fell 1.3% and the prior month was revised downward from -2.1% to -2.8%. Ex transportation, durable goods orders rose 0.3%. Capital Goods rose 0.4%, which is one bright spot in the report.

Mortgage applications rose 1.3% last week as purchases fell about a percent but refinances rose 3.2%. The 30 year fixed rate mortgage fell 8 basis points to 4.06%.

Jerome Powell spoke in NY yesterday and addressed some of the issues the Fed is dealing with.

Let me turn now from the longer-term issues that are the focus of the review to the nearer-term outlook for the economy and for monetary policy. So far this year, the economy has performed reasonably well. Solid fundamentals are supporting continued growth and strong job creation, keeping the unemployment rate near historic lows. Although inflation has been running somewhat below our symmetric 2 percent objective, we have expected it to pick up, supported by solid growth and a strong job market. Along with this favorable picture, we have been mindful of some ongoing crosscurrents, including trade developments and concerns about global growth. When the FOMC met at the start of May, tentative evidence suggested these crosscurrents were moderating, and we saw no strong case for adjusting our policy rate.

Since then, the picture has changed. The crosscurrents have reemerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy. Our contacts in business and agriculture report heightened concerns over trade developments. These concerns may have contributed to the drop in business confidence in some recent surveys and may be starting to show through to incoming data. For example, the limited available evidence we have suggests that investment by businesses has slowed from the pace earlier in the year.

Against the backdrop of heightened uncertainties, the baseline outlook of my FOMC colleagues, like that of many other forecasters, remains favorable, with unemployment remaining near historic lows. Inflation is expected to return to 2 percent over time, but at a somewhat slower pace than we foresaw earlier in the year. However, the risks to this favorable baseline outlook appear to have grown.

Last week, my FOMC colleagues and I held our regular meeting to assess the stance of monetary policy. We did not change the setting for our main policy tool, the target range for the federal funds rate, but we did make significant changes in our policy statement. Since the beginning of the year, we had been taking a patient stance toward assessing the need for any policy change. We now state that the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation. Many FOMC participants judge that the case for somewhat more accommodative policy has strengthened. But we are also mindful that monetary policy should not overreact to any individual data point or short-term swing in sentiment. Doing so would risk adding even more uncertainty to the outlook. We will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.

The Fed Funds futures turned slightly less accomodative after the speech. They are now looking at something like a 70% chance of a rate cut at the July meeting, and the markets are coalescing around 75 basis points in cuts this year.

The Trump Administration established a White House Council on Eliminating Barriers to Affordable Housing which will focus on removing burdensome regulatory barriers. The council will work to identify federal, state, and local barriers to affordable housing, and will take action to remove federal and administrative regulatory burdens. Note there is no mention of taking action to remove “state and local regulatory burdens,” which is often zoning restrictions. The Obama HUD aggressively sued local jurisdictions to force them to change their zoning laws from single family only to multi-family, but it looks like the Trump Administration won’t be going down that route.

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical View all posts by Brent Nyitray