LAST WEEK

News & Commentary Weekly Highlights:

• Wall Street Journal: Fed Chairwoman Janet Yellen Sees Stronger Case for Interest-Rate Increase (Friday)
• Market Watch: Fed turns up the volume; market tunes out the message (Wednesday)
• CNBC: Four top banks join forces on new digital currency (Wednesday)
• Daily Signal: 5 States, Nearly 700 Counties Don’t See ‘Choice and Competition’ Promised by Obamacare (Tuesday)
• Daily Signal: Find Out How Many Jobs Your State Could Lose With a $15 Minimum Wage (Monday)

 

Top Economic Indicator Highlights:

Existing Home Sales (July 2016)

• Existing home sales (seasonally adjusted, annual rate)
  • July: 5,390,000 (preliminary); June: 5,570,000 (revised); May: 5,510,000
  • Median sale price of existing homes
    • July: $244,100 (preliminary); June: $247,600 (revised); May: $238,900
    • Noteworthy: July existing home sales are down 3.2% (year-over-year).  This is the first decrease since November 2015.  The National Association of Realtors attributes the slowdown to a lack of available inventory.

 

THIS WEEK

Upcoming Economic Reports & Releases:

Major Indicators

• Personal Income/PCE Deflator (8:30am, Mon)
• Dallas Fed Manufacturing Survey (10:30am, Mon)
• Consumer Confidence Index (10:00am, Tue)
• Dallas Fed - Texas Retail Outlook Survey (10:30am, Tue)
• ADP National Employment Report (8:15am, Wed)
• Chicago Purchasing Managers Index (9:45am, Wed)
• Pending Home Sales (10:00am, Wed)
• Jobless Claims (8:30am, Thu)
• Productivity and Costs (8:30am, Thu)
• Construction (10:00am, Thu)
• ISM Manufacturing (10:00am, Thu)
• Motor Vehicle Sales (4:00pm, Thu)
• Employment Situation (8:30am, Fri)
• Trade Balance (8:30am, Fri)
• Manufacturers’ Shipments, Inventories, & Orders (10:00am, Fri)

Chart of the Week:

Quarterly, the Federal Reserve publishes “dot plots,” which indicate where members of the Federal Open Market Committee (FOMC) expect the interest rate target (the fed funds rate) to be at the end of December in a given year.  The two graphs in the chart above show how the fed fund rate was/is predicted to evolve over time according to the FOMC members’ median forecast (green) and the bond market (blue).

 

Typically, when economic activity is slow or slowing, the Federal Reserve targets a low fed funds rate to incentivize household and businesses to borrow.  Conversely, when economic activity is expanding, the Fed targets a high fed funds rate to prevent inflation by slowing household and business spending.  The left-side graph indicates that actual economic conditions over the past few years were much worse than either the Fed or markets projected, given the extraordinarily low fed funds rate.  For example, in Dec. 2012, the Fed anticipated the Dec. 2015 interest rate would be 1 percent, while the market anticipated 0.36 percent.  In Dec. 2015, the actual fed funds rate was 0.2 percent.

 

The right-side graph shows the FOMC’s and market’s forecast of the path of future interest rates as of Jun. 2016.  The Fed is forecasting interest rates to be at 2.375 percent in Dec. 2018.  In contrast, the bond market is betting on 0.645, indicating the market is more pessimistic about the prospects for an improving economy.