The markets saw quite a bit of volatility this week, as it was all eyes on the Federal Reserve. We will discuss the Fed below, but here is a quick recap of how the markets performed this week:
Index Level 1 Week YTD
Dow Jones 18,127.65 2.13% 1.71%
S&P 500 2,108.06 2.66% 2.39%
NASDAQ 5,026.41 3.17% 6.13%
WTI Oil 45.72 1.96% -14.17%
MSCI EAFE 1,887.31 3.94% 6.33%
MSCI EM* 964.98 2.71% 0.91%
* As of 3/19/2015
Federal Reserve Removes the term “Patient” from their Monetary Policy Statement:
When referring to when the Federal Reserve will raise interest rates, the term “patient” will no longer appear in the Monetary Policy Statements. The Fed noted that, because unemployment has fallen to 5.5%, the economy is closer to a point where low borrowing costs will no longer be the crutch the economy has needed. While dropping the “patient” language from the minutes, Fed Chair Janet Yellen stopped short of suggesting an interest rate hike is imminent. “Just because we removed the word patient from the statement doesn’t mean we are going to be impatient,” Ms. Yellen said in a post-meeting press conference.
The Fed did state they would like to see further improvement in the job market and higher inflation before they begin raising interest rates. And even after they begin raising rates, there is no indication how/when they will raise them again. “When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run,” the Fed statement said.
The Fed also updated its economic forecasts, revising them downward. The Fed now expects economic output to expand between 2.3% and 2.7% in 2015, lower than their December estimates of 2.6% to 3%. 2016 and 2017 forecasts were also lowered, as the Fed sees economic growth moderating somewhat. However, Ms. Yellen tried to caution against reading into the these numbers too much. “It is important to recognize that this is not a weak forecast. We continue to project above-trend growth. We continue to project improvement in the labor market,” she said.
The markets reacted favorably to Ms. Yellen’s comments, and the current interpretation is that the Fed will not raise interest rates until September.
Housing Starts Fall in February:
Housing starts fell more than anticipated in February, as 897,000 starts were recorded for the month. This was much lower than the average economist estimate of 1.065 million. This metric is notoriously hard to read, as a variety of extraneous factors can impact this reading. It’s very likely that the harsh winter weather played a big role in this decline, especially in the Northeast where housing starts were down 56.6%. The sluggishness was not limited to just the Northeast, however, as all markets showed declines. Midwest housing starts were down 37%; the West down 18.2%; and the South down 2.5%. While these numbers show sluggishness, they are not alarming unless this is the beginning of a trend downward. This does not appear to be the case, as housing permits were up more than forecast for February. 1.092 million permits were issued, well ahead of the 1.053 million estimate.
Jobless Claims Rise Slightly:
Americans filing new claims for unemployment benefits rose last week to 291,000, slightly below the average estimate of 293,000. The numbers point to steady growth in the labor market but are not considered spectacular. These claims have certainly shown volatility over the last few months, but the trend we are seeing remains consistent with a strengthening jobs market. These numbers were especially important this week given the Fed’s desire to see improvements in the labor market before raising interest rates.
Obama Administration Releases New Fracking Rules:
Today, the Obama Administration released a new set of comprehensive rules for hydraulic fracturing, more commonly known as fracking. Hydraulic fracturing is a practice by which companies blast a slurry of water, sand and chemicals into a well to unlock oil and natural gas reserves trapped in shale-rock formations. Companies have been fracking for decades. In recent years, the practice has become much more common as technology advanced. It has become controversial due to its environmental impact, including its potential to contaminate drinking-water supplies.
For now, the rules only apply to oil and gas drilling on federal and tribal land, which means about 5% of oil drilling and 11% of natural gas drilling in the US is affected. The rules do not apply to the majority of fracking, which is done on privately-owned land. The regulations are mostly aimed at water contamination and shouldn’t have an immediate impact on gas prices. Still, the rules are thought to be “suggestions” to meet (or surpass) for state regulators, as each state sets its own regulations on fracking.
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