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Fed Holds Rates Steady

May 2, 2018

 

Overview: After reaching the highest levels in four years last week, mortgage rates managed to reverse direction unrelated to any specific economic news. The reaction to the economic data and the Fed meeting was minimal, and mortgage rates ended the week a little lower.

As expected, the Fed did not change the federal funds rate at Wednesday’s meeting, and the statement released after the meeting was similar to the prior one. Regarding inflation, the statement said that it “has moved close to 2%” and that officials expect it to run near the Fed’s “symmetric 2% objective over the medium term.” The statement also noted that the risks to the economic forecast are “roughly balanced.” The outlook for the pace of tightening by the Fed was little changed after the meeting. Investors now anticipate about a 50% chance that there will be four rate hikes in 2018. At the start of the year, this probability was close to zero.

 

The inflation measure favored by Fed officials is the core Personal Consumption Expenditures (PCE) Price Index. The most recent reading released on Monday revealed that the price level of the items included in the core PCE Price Index in March was 1.9% higher than a year ago, up from an annual rate of increase of 1.6% last month. The higher annual rate matched the level expected by investors.

 

The first reading for first-quarter gross domestic product (GDP) growth, the broadest measure of economic activity, was forecasted to be 2.0%, but came in at 2.3%. The outperformance was due to strength in business investment and a buildup in inventories, while consumer spending fell a little short of expectations. Early estimates for second-quarter GDP growth are for an increase of about 3.2%. 
 
Week Ahead 

Looking ahead, the Institute for Supply Management (ISM) Services Index will come out on Thursday. The important monthly Employment Report will be released on Friday. This data on the number of jobs, the unemployment rate, and wage inflation is the most highly anticipated economic data of the month. The Consumer Price Index (CPI) will come out on May 10. CPI is a widely followed monthly inflation report that looks at the price change for goods and services.

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