After a pensive start to the session, the market is picking up on yesterday’s momentum, helped by comments from Fed officials and a better-than-expected report on existing home sales.

Before the open, Federal Reserve Bank of St. Louis President Jim Bullard released a statement explaining his dissenting vote at the FOMC meeting earlier this week.

Part of his statement:

I dissented with the Federal Open Market Committee (FOMC) decision announced on June 19, 2019, to maintain the target range for the federal funds rate at 2.25% to 2.50%. In my view, lowering the target range by 25 basis points to 2% to 2.25% would have been the most appropriate course of action. The following considerations factored into my decision.

First, both the core and headline personal consumption expenditures (PCE) inflation measures have declined substantially since the end of last year and are presently running some 40 to 50 basis points below the FOMC’s 2% inflation target.

Market-based measures of inflation expectations have also weakened considerably and indicate an expected inflation rate substantially below the Committee’s target. The forces that are keeping inflation below target seem unlikely to be solely transitory.

While the unemployment rate is low by historical standards, there is little evidence that low unemployment poses a significant inflation risk in the current environment.

Bullard Claps Back

For me, this statement goes well beyond advocating for an insurance policy against a possible slow down already in the pipeline.  Bullard is worried about slower economic trends, and he’s worried persistently low levels of inflation are not temporary or short term.

In fact, he took a shot directly at Chairman Powell who made this observation on May 1.

So “persistent” carries the sense of something that’s not transient, something that will sustain over a period of time. And in this case, as we look at these readings in the first quarter for core, we do see good reasons to think that some or all of the unexpected decrease may wind up being transient.

And I’d point to things like portfolio management, service prices, apparel prices, and other things… trimmed mean measures of inflation did not go down as much.

But to go back to your question, if we did see a persistent inflation running persistently below, then that is something the Committee would be concerned about and something that we would take into account in setting policy.

But Bullard is not buying that assessment, as his statement underscores: “The forces that are keeping inflation below target seem unlikely to be solely transitory.”

James Bullard wanted a 25-bps rate cut, but Neel Kashkari President of Minneapolis advocated for a 50-basis-point rate cut.   He sees such a move as an insurance policy with little risk.  But 50 bps seems drastic for insurance. 

Kashkari is just an observer now, and he becomes a voting member of the FOMC next year.

Home Sweet Home

“The purchasing power to buy a home has been bolstered by falling mortgage rates, and buyers are responding.” NAR

Existing home sales in May came in at annualized rate of 5.34 million +2.5% from April. 

Single family

• 4.75 million +2.6%
• $277,700 +4.6% (biggest jump since August 2018)

Condos & Co-Ops

• 590,000 +1.7%
• $257,100 +5.4%

Existing Home Sales

I’m very impressed the market is higher today. It would have been normal to see more profit-taking, but early selling was met by buyers.

Still, it’s all very tenuous at the moment.  Have a great weekend.

Comments

I think that the Fed rate should be on hold or raised not cut. (unless the rate is temporarily lowered so that we could pay down debt ?) Tim Pattee on 6/23/2019 12:16:44 PM

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