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Look behind at September 16, 2019 week: the Fed cuts short-term rates, the New York Fed acts to meet cash crunch at mid-month

A look back at the September 16 week reveals a few pieces of interesting economic data, but of course the numbers were overshadowed by two things.

First was the necessity of the New York Fed to perform four separate overnight repurchase operations to get the fed funds rate back within its target range (Tuesday, up to $75 billion, 2.00%-2.25%; Wednesday, up to $75 billion, 2.00%-2.25%; Thursday, up to $75 billion, 1.75%-2.00%; Friday, up to $75 billion, 1.75%-2.00%). On Friday, the New York Fed announced overnight and term repo operations for the following week. The first four in the September 16 week were something of a surprise related to a cash crunch around tax payment time. The schedule of operations does not mean the overnight borrowing will take place, only that the funding operations will be there if needed. Since it looks like the need may still be there with quarter end coming up, the Fed will act to ensure that liquidity is ample in repo markets and rates remain in the fed funds target rate range. Policymakers are casting this in the context of unexpected demand for short-term cash met by routine and appropriate action on the part of the Fed, and that it does not constitute any sort of fundamental problem.

Second, the outcome of the FOMC meeting of September 17-18 was as expected, at least in terms of the arrival of another 25 basis point reduction in the fed funds target range from 2.00%-2.25% to 1.75%-2.00%. The reasons given were the same as those behind the cut after the July 30-31 meeting, i.e. adding back a little accommodation to protect the expansion at a time of uncertain trade policy and to ensure that inflation started to rise again to reach the Fed’s symmetric 2% inflation objective. However, the divide among policymakers as to the appropriate action was full display. The vote was 7 for, 2 against cutting, and 1 saying not enough of a cut. Chair Jerome Powell was again hard-put to convey a consensus in monetary policy in his post-meeting Q&A session with the press.

See Whetstone Analysis Reference Library for history of FOMC rate decisions.

The update to the FOMC’s Summary of Economic Projections (SEP) was a source of some discontent to markets in that it affirmed Powell’s assertion on September 6 that most policymakers are not forecasting a recession in the wake of a vigilant FOMC acting preemptively and most find the outlook good, if growth on a path that is at best modest. It suggested the FOMC is done cutting rates for 2019 absent a downturn in the data or negative geopolitical development. It also indicated the GDP forecast for 2019 was up a tenth to 2.2% and the unemployment rate would end the year at 3.7%, up a tick from the prior forecast. On net, the presence of moderate growth, unemployment well below the longer-run 4.2% expectation for a lengthening period, and inflation expected to return nearer target could keep monetary policy on hold for now as prescribed by the dual mandate.

The economic data in the week showed that manufacturing activity continued its bumpy downward momentum in September, although for now it is modestly expanding. The New York and Philadelphia numbers led the way this week. The respective general business activity indexes declined, as did both indexes for future activity. Present softness is not expected to rebound any time soon. The New York Fed’s service sector index also pointed down in the month, indicating that services – which have weathered the slowing in activity better – are starting to feel the effects of uncertain trade policy and broader economic softening.

The data on industrial production and capacity utilization for August benefited from a rebound in mining activity as oil rigs came back on line after closures in the Gulf of Mexico in July and demand for utilities was up again during another wave of extremely hot weather. Manufacturing output was up broadly for August even with motor vehicle production down. That won’t provide any help in September when the effects of the nationwide strike at GM at began September 16 are felt.

The housing market remains one place that might give the end of the third quarter a boost. The NAHB/Wells Fargo Housing Market Index reached its highest level in 10 months at 68 in September. The present sales component supports that new home sales are doing well, and sales expectations remain solid along with customer traffic. The numbers of starts of new homes in August reached a post-crisis high of 1.364 million units. Although a good bit of that was a jump in multi-unit starts, single-family home starts was the best in 8 months when the first declines in mortgage rates started to renew demand for homes. Permits-issued also hit a post-crisis high of 1.419 million units. It, too, was due to a surge in multi-unit permits but that should not diminish that single-family permits were at their best in over a year.

There won’t be a look at sales of new single-family homes in August until Wednesday, September 25 at 10:00 ET. However, sales of existing homes ramped up to 5.49 million units (SAAR), their best since 5.510 million units int March 2018. Much of the credit can go to recent declines in mortgage interest rates and improved household budgets from rising incomes.

There was a warning sign about mortgage rates in the weekly numbers from Freddie Mac. All rates were up for a second week in a row. Although the 3.73% 30-year fixed rate as of September 19 is by no means an unattractive rate, it does hint that the bottom on rates may have passed, at least for now.

Data on initial jobless claims for the week ended September 14 was a second week in a row that was scarcely above the psychologically important 200,000-level. The fundamentals of the labor market remain consistent with low numbers of layoffs and workers able to move off unemployment rolls fairly quickly. The strike at GM is going to mean the numbers will rise – and perhaps significantly – in the next few weeks. Most union workers cannot collect unemployment benefits during a strike, although they can apply which could mean a big chunk of filings. Where the numbers will be more meaningful is for businesses associated with supplying and supporting plants and workers where layoffs could take place quickly. It is possible that the insured rate of unemployment will nip up from the 1.2% that has been in place since May 2018.


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