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Fed Holds Steady

Overview: Over the past week, global central banks indicated that while continuing to fight inflation, they plan to hold short-term rates near current levels even longer than investors anticipated. As a result, mortgage rates increased a little, ending the week around the highest levels in over 15 years.


As expected, at the meeting on Wednesday, the Federal Reserve made no change in the federal funds rate, which is at the highest level since 2001. The accompanying statement was essentially unchanged from the one released after the previous meeting. So, investors mostly focused on the latest set of economic projections, particularly for the future path of the federal funds rate. The median forecast of 19 Fed officials was for one additional 25 basis-point rate hike this year and higher rates continuing for the next few years, which is longer than projections made three months ago. Despite this outlook, investors are still split about whether there will be another rate hike this year.

On Thursday, the European Central Bank (ECB) raised benchmark interest rates by 25 basis points to help bring down inflation. This brought rates in Europe from negative levels at the start of 2022 to a record high now. Of note, the meeting statement indicated that this was anticipated to be the last rate increase in the current cycle. Essentially, investors anticipate that rates in Europe are likely to be held at current levels for quite a while.

Despite numerous headwinds such as higher prices and credit card rates, consumer spending has remained a major source of strength for the economy. In August, retail sales surged 0.6% from July, far above the consensus for an increase of just 0.2%. However, nearly all of the excess gains came from sales of gasoline, where prices were significantly higher in August. Outperformance was also seen at clothing and electronics stores.

With a severe shortage of previously owned homes on the market, additional inventory continues to be badly needed, but the latest data was mixed. In August, overall housing starts unexpectedly dropped 11% from July to the lowest level since June 2020, mostly due to weakness in multi-family units. More encouragingly, building permits, a leading indicator, rose for both single-family and multi-family units. A separate survey of home builder sentiment from the National Association of Homebuilders (NAHB) unexpectedly fell from 50 to 45, the lowest level in five months. Builders continued to attribute the decline in their outlook to higher mortgage rates and rising costs.


Retail Sales (% change)

Week Ahead

September 21

Existing-Home Sales report

September 26

Consumer Confidence Index

New-Home Sales report


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