Work to do

Though the Federal Reserve did not raise its federal funds rate at its June 14 meeting, its tough talk since then has kept markets on edge. 

Stronger than expected economic data have challenged the idea that the U.S. economy is slowing into recession. Though somewhat dated now, housing data released last week point to higher prices and new home sales in April and May, even though mortgage rates have stayed relatively high. Regional manufacturing surveys in Dallas and Richmond improved, and durable goods orders and capital goods shipments both beat forecasts. First quarter GDP growth was revised higher, from 1.3% to 2%, driven primarily by higher consumer spending but also residential investment. Weekly jobless claims fell from 265,000 to 239,000 (data series perhaps distorted by the new Juneteenth holiday).

All these reports help to buttress consumer sentiment: the Conference Board and the University of Michigan survey saw confidence rise on improved assessments of the current and future situations, so the consumer feels pretty good. Probably more important is the drop in the Personal Consumption Expenditures Index for May. It showed monthly inflation falling from 0.4% to 0.1%, and from 4.3% to 3.8% over the last year. This is a notable improvement, but still well above the Fed’s 2% inflation target, confirming policymakers have work to do. This is likely what Fed Chair Powell was referring to when he said that the Fed may hike more. But he also said the Fed would move more slowly and put more time between decisions. 

The next Federal Open Market Committee meeting is on July 26. But for now, markets are more focused on the July 4 holiday and summertime.