Fed Remains Accommodative, Retail Is Bouncing Back

September 16, 2020

 

Overview: Neither the Federal Reserve meeting nor the economic data had much impact on mortgage markets over the past week. Rates again ended little changed, close to record-low levels.

At Wednesday’s meeting, Fed officials confirmed what most investors had anticipated for quite a while. In short, to help support the economy, the Fed has no plans to raise the federal funds rate for the next few years. According to the statement, the Fed will maintain short-term rates near zero until the labor market reaches “maximum employment” and inflation has risen above 2%. Officials also revised their 2020 gross domestic product (GDP) projections from June, which forecasted a decline of 6.5%, to a smaller drop of 3.7%.

 

Since consumer spending accounts for over two-thirds of all economic activity in the U.S., the retail sales data is a key indicator of growth. Following large declines in March and April due to the pandemic, retail sales have bounced back rapidly, and the trend continued in August with a solid increase of 0.6% from July. Purchases of clothing and furniture were particularly strong.

 

The reduced economic activity from previous months has caused a significant decline in inflation. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. In August, core CPI was 1.7% higher than a year ago. While this was up from recent levels of just 1.2%, it still was far below the readings of around 2.3% seen during the first few months of the year, prior to the pandemic.

 

Retail Sales (% change)

 

Week Ahead

September 17 — New Residential Construction report (aka Housing Starts)

September 22 — Existing Home Sales report

September 24 — New Home Sales report

 

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