The big news of the week was the widely expected non-action by the Federal Reserve, keeping the fed funds rate unchanged at the September 20-21 FOMC meeting. Importantly, Janet Yellen, in her post-announcement press conference, reaffirmed her expectation that interest rates will increase in the future. The expectation was reinforced by the three FOMC members who chose to vote against Wednesday’s policy action. Esther George of Kansas City, Loretta Mester of Cleveland and Eric Rosengren of Boston all would have preferred to raise to the fed funds rate on Wednesday.
We also saw in the Fed’s new “dot plot” that the expected trajectory of the fed funds rate over the next few years has become even shallower, putting the Yellen Fed on an unprecedented course defined by the ultra-slow pace of policy normalization. Yellen’s statements in her press conference focused market attention on the December 13-14 FOMC meeting as the most likely date for the next rate hike. We believe that the Fed will not risk getting pulled into the turbulent political pool with a rate hike on November 2, less than a week before the general election on November 8. We are maintaining our forecast for a 25 basis point increase in the fed funds target range in December. As of Friday morning, the fed funds futures market is showing an implied 59 percent probability of at least one rate hike by December 14.
Also on Wednesday, the Bank of Japan released a monetary policy announcement that contained two small changes to Japan’s monetary policy. First, the BOJ will now include longer-term sovereign bonds in their basket of asset purchases. This was introduced with the concept of “yield curve control.” The BOJ also said that their inflation rate target has been modified from “2 percent” to “2 percent or above.” Both of these changes are marginal and do not represent a sudden change in direction for the BOJ. The value of the yen climbed against the dollar on Wednesday, implying that financial markets are skeptical of the efficacy of the BOJ’s shift in strategy.
Washington, D.C. will remain in the economic news in the week ahead. Congressional leaders will try to put together a compromise budget that will keep the federal government running after the current budget expires at midnight on September 30. The Senate is expected to vote on a budget on Tuesday. The House will take up the plan following the Senate vote. The odds of a federal government shutdown in October appear to be low.
Housing starts for August fell by 5.8 percent to a 1.142 million unit annual rate. Both single and multifamily construction eased for the month. Building permits were essentially unchanged, dipping by 0.4 percent in August.
Existing home sales for August eased by 0.9 percent, to a 5.33 million unit annual rate. The median sales price of an existing home was up by 5.1 percent in August compared with a year earlier.
The Conference Board’s Leading Economic Index for August decreased by 0.2 percent, consistent with other economic metrics for the month that softened from strong June and July levels. The coincident index increased by 0.1 percent in August, its third straight gain. The lagging index gained 0.2 percent in August. Taken together, the three indexes make the case for steady, but unspectacular, growth through the end of this year.
Initial claims for unemployment insurance fell by 8,000 for the week ending September 17, to 252,000.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 09-23-2016.