The Federal Reserve announces no change in Monetary Policy 9/19/14

Janet Yellen and the Federal Open Market Committee (FOMC) met this week and announced they will not make any changes at this time to monetary policy.  They made the following statement after the meeting: “The recent data suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Longer-term inflation expectations have remained stable.”


Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.


The FOMC believes that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.


To support continued progress towards maximum employment and price stability, the Committee reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 0.25 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and maintaining stable prices. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.


Congress passes bill to fund war against ISIS:


Congress passed President Barack Obama’s plan to arm and train Syrian rebels, giving him a victory less than seven weeks before the November midterm election.  Today’s 78-22 Senate vote came a day after the House passed the measure, which now goes to Obama for his signature. Senate officials revised the vote from 73-22 after they said an incorrect result was read on the floor. Ten Democrats and 12 Republicans voted against the measure.  The bipartisan vote “shows the world that America is united in confronting the threat” from Islamic State extremists, Obama said at the White House after the vote. Strikes against terrorists continue today, he said, adding, “As Americans we do not give in to fear.”


The ISIS funding bill was part of a package of legislation that funds the government through Dec. 11, extends the Export-Import Bank’s charter through June 30, and provides $88 million to help fight the spread of the Ebola virus in West Africa.


U.S. Cost of Living falls:


The cost of living in the U.S. unexpectedly dropped last month for the first time in nearly a year and half, showing that inflation has cooled after accelerating in the second quarter. The Labor Department said that consumer prices declined .2%–the first decrease since April 2013. The primary driver of the decline were big drops in monthly gasoline prices (-4.1%) and airfares (-4.7%). Core prices, which exclude the volatile food and energy components, were unchanged last month for the first time in four years. Overall consumer prices climbed 1.7% in the 12 months ending in August, down from a 2% year-over-year gain in July. Subdued inflation has given the Fed flexibility to maintain interest rates at record lows even as growth has accelerated.


Housing market shows renewed strength:


U.S. mortgage applications climbed last week by the most in three months as Americans rushed to refinance their homes amid rising interest rates. The Mortgage Bankers Association announced that applications for new mortgage loans rose 7.9% in the week ending September 12th. It was the biggest jump since the beginning of June and reversed a 7.2% decline in the prior week. Refinancing applications rose 10.3%, while applications to finance new purchases climbed 4.8%. The national average rate for a conventional 30 year mortgage loan rose for a second week to a three-month high of 4.36%. The average rate on 15 year mortgages also increased to 3.56%–the highest level since April.


Confidence among U.S. homebuilders rose in September to a nine-year high, which indicates the industry is gaining ground and will be a source of momentum for the economy.


The National Association of Home Builders/Wells Fargo sentiment measure climbed to 59, exceeding the highest estimate in a Bloomberg survey of economists, from 55 in August, the Washington-based group reported today. Readings above 50 mean more respondents said conditions were good.


Improvement in the job market and low interest rates spurred buying interest this month, as the group’s index of foot traffic through model homes jumped to the highest level since October 2005. Faster wage gains would provide extra momentum for residential real estate, which has seen lackluster demand from first-time buyers.


Scottish Voters reject Independence from U.K.


Scots discovered at 6:08 a.m. this morning that they won’t break up the U.K. to become an independent nation as 55.3% of voters supported the “No” campaign against 44.7% who voted for independence.  The threat of Scotland becoming independent has put a lot of pressure on the U.K. government to follow through on its promises to give more power to Scotland.  If they do not provide the changes the Scots seek it is likely they will continue their referendum campaign.


China announces new economic stimulus program:


China’s central bank announced that it will inject 500 billion yuan ($81 billion) into the country’s five biggest banks as it moves to counter slower-than-expected growth in the world’s second-largest economy.


Russia is likely to escalate the conflict in the Ukraine:


After a brief hiatus, the Ukraine/Russia conflict appears to be heating up again.  Although we continue to believe this will not hurt the U.S. economy or markets, it certainly is not comforting.  Putin, in what seems to be an effort to reconstruct the Soviet Union, has worked very hard to create a Eurasian economic union.  However, Russia’s primary trading partners have a different agenda and simply need Russia for economic benefits.  Recently, these benefits have become scarce given the prolonged sanctions, and they are complaining and may look to other sources very soon.


Putin’s action continue to suggest that Russia is moving further away from a capitalist society and closer to a large scale Mafia type system, which was evident this week with another “arrest” of a Russian billionaire that contributed money to organizations that oppose Putin’s iron fist government. We hope eventually the citizens of Russia see thru Putin’s distorted behavior and push for a new leader but that does not look likely at the moment.  In the end he will likely get what he wants – part of the Ukraine and the sanctions could continue for longer than many expect.  This may hurt the European economic recovery in the short term but it may actually lead to some economic benefits to the U.S. if they agree to ramp up energy exports to Europe. 

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