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Weekly Update 3/24/2023: Fed Lifts Rates Again

  • Home sales data released
  • Accenture and General Mills report earnings
  • Apple movies coming soon to a theater near you
  • Abode unveils Firefly

Fed Decision

On Wednesday, the Federal Open Market Committee (FOMC) decided in a unanimous vote to raise the guidance for its fed funds rate to 4.75%-5.00% from 4.50%-4.75%, a raise of 25 basis points (0.25%). This is the highest level for the fed’s benchmark since September 2007. Given the turmoil in the markets following the collapse of Silicon Valley Bank (SVB), the FOMC decided that maintaining a path toward higher rates took precedent to the immediate fears over financial stability. In the statement following the meeting, the FOMC stated: “In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments…The Committee is strongly committed to returning inflation to its 2 percent objective.” The Fed did not completely ignore the current state of the markets adding as part of the statement: “The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.”

There was a lot to unpack in the FOMC decision and Chairman Powell’s post-meeting comments. “The committee anticipates that some additional policy firming may be appropriate,” the statement said. That was a distinct change from the phrase used in their previous eight statements that said the committee anticipated “ongoing increases” in rates would be appropriate. This suggests that the Fed is clearly in the last inning of their rate increases which started twelve months ago. The Fed also released its summary of economic projections as it usually does on a quarterly basis. The newest forecast shows that17 out of 18 officials who participated in the meeting expect the fed-funds rate to rise to at least 5.1% and to stay there through December. That would imply that the Fed is looking for one more 25 basis point hike and then be finished. The FOMC made no changes to their balance sheet runoff plans which involves letting bond holdings shrink by up to $95 billion per month. Powell made it clear that though the balance sheet is de facto growing due to new liquidity programs in the wake of the SVB turmoil, it should not be seen as a sign of financial easing. Powell said he was in favor of independent investigations outside of the Fed into the SVB meltdown as well as more supervision and regulation of banks. Interestingly, when asked if the Fed in Washington knew about the heightened scrutiny bank examiners were taking days before SVB was seized, he remained mum. He did say, as we outlined in our newsletter from last week, that the idiosyncratic nature of SVB played a significant part in its downfall which at its heart can be traced to mismatched duration of assets and liabilities.

It was telling that the crises surrounding SVB, Credit Suisse and First Republic did not stop the Fed from its mission of getting inflation under control. Powell mentioned that core service prices excluding housing were very sticky and not exhibiting the type of disinflation seen in other areas of the market—namely residential housing where high interest rates and uncertain economic conditions have begun to affect prices (see home sales data below). Additionally, the banking panic is creating tighter financial conditions simply because banks will likely be extra cautious in lending requirements going forward. That combination—rate hikes, quantitative balance sheet shrinkage and bank caution—will help the Fed to cull aggregate demand and get it back in-line with aggregate supply which had become mismatched due to the pandemic.

The question now comes down to how the market will interpret the Fed’s path going forward. After a hike in May, the futures markets are pricing consecutive cuts in the fed funds rate through next January. Is this realistic? During the press conference, Powell on more than one occasion said it was not the Fed’s base case scenario to reduce rates at all this year. And this stance is not new. The Fed’s message has been consistent and unwavering that sustained progress towards 2% inflation is the goal and “no one should doubt” that the Fed would do enough. While the rate cycle appears to be about over, it does not mean that things are about to turn towards easing anytime soon. Judging from the fall in the yield of the U.S. 2-year Treasury note, which is very sensitive to Fed decisions, traders seem to want to will a rate cut as soon as possible. This has been a message investors have been learning since this rate hike cycle began—wanting something to happen and having it actually happen when you want are two separate things. The Bank of England raised its own benchmark rate by 25 basis points on Thursday marking its 11th consecutive rate increase adding additional pressure on the global economic front in terms of monetary tightening. Like the U.S. Fed, British policymakers were certain to emphasize that its own banking system was “resilient.” The bottom line is we are likely to see continued volatility until the data itself begins to show some disinflationary trends in that so-called super core services price data. Stay tuned.

Housing Info

Data released on Tuesday showed that existing home sales rose last month by the most since mid-2020. The National Association of Realtors said that sales of previously owned homes rose 14.5% in February to an annualized pace of 4.6 million. This figure exceeded the highest forecasts in a Bloomberg survey of economists. “Conscious of changing mortgage rates, home buyers are taking advantage of any rate declines,” Lawrence Yun, NAR’s chief economist, said in a statement. “Moreover, we’re seeing stronger sales gains in areas where home prices are decreasing, and the local economies are adding jobs.” Based on the current sales pace, it would take 2.6 months to sell all the homes on the market. A figure below five months is considered to be a sellers’ market according to realtors. The median sales price fell 0.2% from a year earlier to $363,000 last month. The decline was the first in 11 years! While about 57% of homes sold were on the market less than a month, on average properties remained available for 34 days, nearly twice as long as a year earlier.

New homes sales data was released yesterday from the Census Bureau and the Department of Housing and Urban Development which showed purchases rose 1.1% last month to an annualized rate of 640,000. The median estimate was for an annualized figure of 650,000 compared to January’s pace of 640,000. This was the third consecutive month of increases though affordability remains a challenge for many home-seekers. There were 436,000 homes for sale as of the end of February, the lowest since April suggesting that inventory levels remain a hurdle. At the current sales rate, this pace of transactions represents 8.2 months of supply. Thus, in contrast to existing home sales, based on last month’s data, there is a buyer’s market in terms of new home sales. Existing home sales are tabulated when the transaction closes while new home sales are collected when the contract is signed.


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