The Week in Review: The Fed Fights the Market
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The Federal Reserve dominated economic news this week, as the central bank prepared America for higher borrowing costs. Citing economic strength despite just 0.5% GDP growth in the first quarter of 2016, the Federal Reserve reiterated its view that June would be an appropriate month to increase its Federal funds rate target. This rate influences the interest rates on many forms of debt, from U.S. Treasuries to mortgages.
The Federal Reserve dominated economic news this week, as the central bank prepared America for higher borrowing costs. Citing economic strength despite just 0.5% GDP growth in the first quarter of 2016, the Federal Reserve reiterated its view that June would be an appropriate month to increase its Federal funds rate target. This rate influences the interest rates on many forms of debt, from U.S. Treasuries to mortgages.
Despite frequent hints that another rate hike was around the corner, markets had been pricing in a low probability of such an event, and borrowing costs have stayed extremely low. The 30-year fixed-rate mortgage remained at historic lows and down on a year-over-year basis. A recent Freddie Mac survey of borrowing costs found 30-year mortgages had an average 3.58% interest rate, down from 3.84% a year ago.
Similarly, U.S. Treasury rates remained near all-time lows as market participants expected the Fed to delay a rate hike well into September or further. Markets, however, have swiftly responded to the Fed’s signal that a rate hike is very likely next month. The three-month U.S. Treasury, which was yielding just 0.22% a month ago, saw its yield rise over 36% in the past month.
Most of those gains occurred after the Federal Open Market Committee released minutes to its meeting, which cited strong economic conditions “leaving open the possibility of an increase in the federal funds rate at the June FOMC meeting,” according to the group’s minutes.
New Data
Several economic reports released this week have shown some renewed strength in the economy, which has driven more market participants to expect a June rate hike.
The Conference Board’s Leading Economic Index (LEI) rose to 0.6% in April, after being 0% in March. The increase was above expectations. This index, which incorporates manufacturing, employment, housing, credit, and stock data, showed renewed improvement, with only consumer spending showing softness.
“The U.S. LEI picked up sharply in April, with all components except consumer expectations contributing to the rebound from an essentially flat first quarter,” said Conference Board executive Ataman Ozyildirim.
Meanwhile, some data from the Federal Reserve has also showed renewed strength. The Chicago Fed’s National Activity Index rose to 0.10 in April after showing -0.55 the prior month. The Philadelphia Federal Reserve’s survey of business outlook, which measures businesses’ economic sentiment, fell from -1.6 in April to -1.8 in May, despite expectations of an increase into positive territory, however.
The labor market also showed hints of renewed strength, as initial jobless claims fell to 278,000, although the decline was less than expected.
