The Federal Reserve Board (FRB) met and did nothing as expected. Their phrasing increased the likelihood of a rate increase in September, so what now for markets?
Nothing… Absolutely nothing. Markets, as of late, have been more driven by action or inaction by Europe and Japan. Markets are looking for indication of how central banks plan to combat issues in developed economies that have already introduced negative rates with little success. On Friday the Bank of Japan (BoJ) met and reported their policy updates, stealing the lime light from the FRB.
Okay, so that was a little dramatic. It does mean something for the U.S. economy, but more importantly the FRB is data dependent. So what they say 6 weeks before the next meeting is irrelevant in comparison to the data released over the next 6 weeks, such as consumer price index, manufacturing, employment data, etc. These will drive the rate decision. The real result from this week’s meeting was that the FRB held pat on rates and did not surprise markets.
Housing Data
Housing data improved this week, much as it had the week before. Home prices increased less than expected, but still grew 5.2%. New home sales, a much smaller grouping than existing sales, grew by more than twice the expected 1.6%, expanding 3.5% in June[2]. Continued strength will be supported by historically low interest rates as the US continues to be viewed as the ‘flight to safety’.
US Data
Consumer confidence firmed more than expected at 97.3. A weak sign on the economy was that core durable goods slowed 0.5% when it was expected to expand 0.3%. This was fitting given 2nd quarter GDP underwhelmed at 1.2% when it was expected to be 2.6%[3]. Much of the growth during the quarter was attributed to consumer spending and capital investment by corporations were much weaker than anticipated.
Conclusion
While the FRB desperately wants to continue to raise interest rates, they understand the fragile state of the economy. They have yet to firm their language in such a way that makes a rate hike appear eminent. They try hard to be very transparent regarding their actions, as not to swing markets too much in either direction. The effort they make to be transparent has led to a perpetual slow play on the rate environment, making the likelihood of a rate hike in the near term relatively low.
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[1] Cards [2]ID: 277972 © Fedor Patrakov | Dreamstime Stock Photos
[2] www.investing.com – economic calendar
[3] www.investing.com – economic calendar