Market Overview

US Federal Reserve Chair Jerome Powell in his recent speech before members of the Greater Providence Chamber of Commerce painted a bright almost unclouded outlook for the past decade and short-term perspective.

The corner point of the testimony that FED has a well positioned monetary policy and will continue to signal the market if any change is needed. The flagging factors for US economy closely monitored by FED are muted inflation and weakness in manufacturing. The key to ongoing favorable outlook is household spendings, which represents about 70% of the economy, supported by strong job market, rising incomes, and solid consumer confidence.

FED’s mandate granted by US Senate is based on too major targets – a price stability and employment. Regarding price stability, the US monetary policymaker is targeting core inflation rate (Core PCE inflation) at 2% benchmark and an unemployment rate that could be prompted by monthly non-farm payrolls figures. However, to assess a job market additional indicators are to be monitored such as Average hourly earnings that is purely associated with consumption perspectives over time. 

To meet the mandate targets Federal reserve is navigated by two guiding stars. One of these is “r star” which is the neutral interest rate neither restraining the economy nor pushing it upward. The second “u star” to achieve the possible lowest unemployment rate or neutral unemployment rate that would not put an upward pressure on inflation.

One may find nothing interesting in above though almost every monetary policymaker worldwide more or less acts in consistence with these “stars”. So, if someone wants to anticipate the change in US monetary policy such indicators should be monitored and properly addressed. More sophisticated is the timing of a decision making by Federal Open Market Committee (FOMC). As Powell indicated FED never has “a crystal clear real-time picture of how the economy is performing” due to a possible revisions of incoming data, i.e. revision of payroll job creation by the Bureau of Labor Statistics in August 2019.

What should be on watch to anticipate next FED’s interest rate action?

Federal Reserve independence seems to be reaffirmed despite constant challenge from US President Donald Trump. Thus, the incoming data is at the first place in decision making by FED.

If unemployment rate remains at historic lows or nearly at the bottom, as it does for more than a year, and no signs of slowing down inflation in place interest-sensitive sectors become the matter to be monitored, housing sector and consumer durable goods specifically.

Why are they so much of importance? One should take a look at a housing sector in 2006-2007 when a subprime mortgage crisis propelled Great recession. A sharp fall in new home sales in 2H 2006 flagged a possible downturn in this sector. To distinguish a coming downtrend in sales we should keep an eye on rising personal income and again low unemployment rate. Furthermore, delinquency rate is important and house price trend has to be moderately up. At last homeownership rate should be more or less fluctuating around a constant level (63-65% for US as a current benchmark) without any significant up or downtrend.

Consumer durable goods represent the new orders for expensive items that last three or more years. Households and individuals are those who are buying such items only if they are confident about economy’s and their personal finance’s health. Significant slowdown or a drop in new orders could signal of consumer confidence deterioration.

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