Yesterday, the Federal Open Market Committee voted to launch a new round of quantitative easing and to extend their forward guidance for the fed funds rate. The Fed will purchase additional agency mortgage-backed securities, at a pace of $40 billion per month. There is no time limit for these additional purchases. The Fed will continue these purchases until the outlook for the labor market improves substantially, meaning that there is now at least a broad (as opposed to specific) unemployment rate target for QE3. The current program of extending the average maturities of Fed holdings (Operation Twist) will continue through the end of this year. The FOMC also voted to extend their forward guidance on the near-zero fed funds rate, saying that exceptionally low levels of the fed funds rate are likely warranted through at least mid-2015. Going forward it is reasonable to expect that equity and commodity prices will get a nudge from QE3. The price for NYMEX crude oil jumped about $2 yesterday to approach $100/barrel after the Fed released its policy announcement. Retail sales for August increased by 0.9 percent, boosted by higher gasoline prices and by the pop in car sales, back up to a 14.5 million unit rate. The national average gasoline price cruised up through August, and now sits at $3.87/gallon according to AAA. Retail sales at gasoline stations ignited in August, gaining 5.5 percent. Retail sales of motor vehicles and parts revved up by 1.3 percent in August. Sales were flat in most other categories, with the exception of building materials, which gained 1.0 percent, possibly spurred by Hurricane Isaac. The consumer price index for August showed the largest monthly gain in more than three years, up 0.6 percent. The energy index was up 5.6 percent, reversing four months of decline. Consumer food prices were sedate, up 0.2 percent. The core CPI (excluding food and energy) was calm, up just 0.1 percent in August. The producer price index for finished goods for August came in hotter than expected, increasing by 1.7 percent. The energy index gained 6.4 percent. Wholesale food prices also increased in August, gaining 0.9 percent. The core producer price index for finished goods was more sedate, increasing by just 0.2 percent for the month. U.S. industrial production fell by 1.2 percent in August as Hurricane Isaac disrupted the Gulf Coast region. The Federal Reserve estimates that Isaac knocked 0.3 percent off of industrial production for the month. The preliminary University of Michigan consumer sentiment index for September jumped to 79.2 percent, still a subdued number, but well above the August reading of 74.3 percent. Business inventories for July were up 0.8 percent for the month, and the inventory-to-sales ratio ticked down after increasing through the second quarter. Initial claims for unemployment insurance increased by 15,000 for the week ending September 8, boosted by Hurricane Isaac. July international trade data was favorable for Q3 GDP as the trade gap was essentially unchanged from June.
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