U.S. economic data at mid-August was favorable. July housing starts increased by a stronger-than-expected 15.7 percent. Existing home sales for July gained 2.4 percent, to a 5.15 million unit annual rate. The Leading Economic Index increased by 0.9 percent in July. The Consumer Price Index was up a tame 0.1 percent.
Monetary policy was front and center this week as both the minutes from the July 29/30 FOMC meeting were released and central bankers from around the world converged in Jackson Hole, Wyoming, for the Federal Reserve’s annual retreat.
The minutes from the July FOMC meeting provide a little more clarity into the Fed’s collective approach to the unwind of extraordinary monetary policy, but some details are still murky. Last spring, FOMC chairwoman Janet Yellen promised that the Fed would release a new set of “exit principles” this year. That will help.
Reported in the minutes, the FOMC believes that they should decrease the size of their balance sheet gradually and predictably to the smallest level consistent with the efficient implementation of monetary policy. The goal is to have a portfolio that consists primarily of Treasury securities. No details of an unwinding strategy or timing were discussed. Unwinding could come passively as assets mature, or it could come actively with sales, or both.
Fed watchers were busy today scouring Janet Yellen’s speech at Jackson Hole for clues about the timing of interest rate lift-off. While still being purposefully vague, Yellen did open the door to earlier interest rate lift-off, if the data supported it. She said, “if progress in the labor market continues to be more rapid than anticipated…or if inflation moves up more rapidly than anticipated…then increases in the federal funds target could come sooner than the Committee currently expects and could be more rapid thereafter.”
To convert that into a schedule you have to make four assumptions: (1) what the FOMC’s current expectation of data is, (2) what the actual data will be, (3) what the FOMC’s schedule for interest rate lift-off would be absent better-than-expected data, and (4) how much they might move the schedule up. For now we are sticking with our call for interest rate lift-off next June.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 08-22-14.