Mix of advances and declines obscure Fed’s view of economy - Trade Only Today

Mix of advances and declines obscure Fed’s view of economy

On Monday the National Association of Realtors told economy watchers that home resales fell 4.8 percent in August.
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On Monday the National Association of Realtors told economy watchers that home resales fell 4.8 percent in August. It was the first decline in four months and a deeper drop than economists expected as the Federal Reserve continues to receive an overall mixed message about a U.S. economy that may or may not need the brake of a rate increase.

The jobless rate has fallen to 5.1 percent, which is close to what the Fed considers full employment, but the central bank left interest rates alone at its September meeting last week, bowing to a weak global economy, low inflation and financial markets that still seem to be operating on shaky ground.

Nevertheless, the decision was a close call. Federal Reserve chairman Janet Yellen said Thursday that a rate increase is still likely this year, and Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, agrees.

“I put most of the decision weight on prudent risk management around recent and current market volatility,” Lockhart said Monday during a speech in Atlanta. “As things settle down, I will be ready for the first policy move on the path to a more normal interest-rate environment. I am confident the much-used phrase ‘later this year’ is still operative.”

Bloomberg said three regional Fed presidents — San Francisco’s John Williams, St. Louis’ James Bullard and Richmond’s Jeffrey Lacker — argued during the weekend for an increase in the central bank’s key interest rate, but the Fed’s own analysis of the economy leaves room for doubt that one will be coming this year.

Morningstar noted that the Fed last week boosted its economic forecast for this year, but lowered its outlook for 2016 and future years.

“Given what we have all seen so far in the third quarter — strong autos, improved retail sales and housing — 3 percent growth or so in the third quarter is a real possibility,” Morningstar said.

“That would mean the Fed is expecting the bottom to fall out in the fourth quarter with GDP growth of just 1 percent or so. It could happen with an external shock, but that just doesn't seem to be the most likely case to us. If the Fed believes its own forecasts of strong deceleration, it most likely would not be raising rates at all in 2015.”

There are only a few significant reports on the economic calendar this week, but one of them will shed further light on the housing market. On Thursday the Commerce Department will issue its report on new-home sales for August. Economists forecast an increase to 515,000 from 507,000 in July.

On the same day Commerce will deliver its August report on factory orders for durable goods. The consensus forecast is for a drop of 2 percent. Orders rose 2.2 percent in July.

The final September reading for the University of Michigan Consumer Sentiment Index will be out on Friday, and economists believe the index will rise to 87.0 from its August reading of 85.7.

Next week will bring data on personal income, consumer spending, core inflation, construction spending, auto sales and the most widely watched figure in the economy — the unemployment report, this time for September.

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