Overview: Inflation concerns continued to be the primary focus for investors over the past week. It was a packed week with both U.S. Federal Reserve and European Central Bank meetings, as well as major consumer spending and inflation data. Mortgage rates reached the highest levels since 2008.
As expected, the Fed raised the federal funds rate by an enormous 75 basis points on Wednesday, the largest increase since 1994, and rate hikes will continue in coming months. Officials now forecast that the federal funds rate will end the year at a level of 3.4%, which is up significantly from their last estimate of just 1.9% in March. Their forecast for economic growth in 2022 was revised down to 1.7% from an estimate of 2.8% in March. In short, the Fed plans to tighten monetary policy much more to fight inflation, even if it slows economic growth.
At its meeting on June 9, the European Central Bank (ECB) announced that it intends to raise interest rates by 25 basis points at its next meeting in July. It also plans to hike rates again in September by either 25 or 50 basis points, depending on whether prices show signs of easing by then. One primary reason for its monetary policy tightening is that inflation in the eurozone reached a record high in May. At an unscheduled special meeting on Wednesday, the ECB also revealed a new program to help support eurozone countries that have high borrowing costs.
Since consumer spending accounts for over two-thirds of U.S. economic activity, it is an important indicator of the health of the economy. In May, retail sales unexpectedly declined 0.3% from April, below the consensus forecast for a small increase, yet still were a solid 8% higher than a year ago. Consumer spending has remained strong so far this year, but rising prices may be starting to have a greater impact.
The latest inflation reading revealed that prices have remained stubbornly high overall. The Consumer Price Index (CPI) is a closely watched inflation indicator that looks at price changes for a broad range of goods and services. Core CPI excludes the volatile food and energy components and provides a clearer picture of the longer-term trend. In May, Core CPI was 6% higher than a year ago, down from an annual rate of increase of 6.2% last month, but still far above the readings around 2% seen early in 2021.
Retail Sales (% change)
June 16 — New Residential Construction report (also known as Housing Starts)
June 20 — Mortgage markets closed in observance of Juneteenth
June 21 — Existing-Home Sales report
June 24 — New-Home Sales report