Federal Reserve meeting minutes indicate more rate hikes ahead in 2018

A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate. Almost all participants saw inflation moving up to the Fed's 2 percent inflation goal over the medium term as growth remained above trend and the labor market stayed strong.

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Federal Reserve maintains current interest rates in monthly meeting

Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/4 to 1-1/2 percent.

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Federal Reserve releases December meeting minutes

The information reviewed for the December 12-13 meeting indicated that labor market conditions continued to strengthen through November and suggested that real gross domestic product (GDP) was rising at a solid pace in the second half of 2017. Total consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), remained below 2 percent in October and was lower than early in the year.

Recent information on housing activity suggested that real residential investment spending was edging up in the fourth quarter after declining in the previous two quarters. Both starts and building permit issuance for new single-family homes increased somewhat in October, and starts for multifamily units moved up considerably. Sales of both new and existing homes rose moderately in October.

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Federal Reserve hikes interest rates another quarter point

Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy. In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1-1/2 percent.

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A Look Ahead to 2018: All systems go, but tax reform impact unknown

In 2017, we saw an economy and a housing market gaining momentum, for one of the longest rebounds in modern history. For 2018, the International Monetary Fund (IMF) is projecting global growth of 3.7 percent, for a slight improvement over 3.6 percent in 2017.

Here in America – and due to a second half of 2017 that was much stronger than the first – the Federal Reserve is projecting the U.S. economy to grow by 2.5 percent in 2018 after finishing 2017 with the same growth rate.

For housing, although tax reform is likely to negatively impact the housing market in both high-priced and second-home markets moving forward, both the overall U.S. economy and new home sales are expected to continue strengthening in the year head.  To combat future inflation, the Federal Reserve is planning on three more rate hikes in 2018, and has stated that it sees some moderate additional growth of about 0.4 percentage points in GDP resulting from tax reform.

However, what may be good for housing demand in terms of low unemployment has also meant tighter labor market conditions, especially for skilled construction trades.  As of October 2017, open jobs in the building industry rose to nearly 230,000, likely setting the stage for higher wage growth ahead.

In addition, the cost of building materials continues to rise, especially for wood products and for Canadian lumber subject to a 21 percent excise tax.

Although an analysis funded by the National Association of Realtors has suggested that tax reform could lower housing prices throughout the country, a larger problem may be that it could discourage existing homeowners from selling to take on pricier non-grandfathered mortgages, or even stay in place for five rather than two years to save on capital gains taxes.  In both of these scenarios, the pace of sales could slow at a time when more supply is needed.

Of course one question mark will be the mindset of Millennials, some of whom are now at that age where they’re starting to form new households, and even leaving urban areas in search of more affordable options in the suburbs.

According to NAR’s 2017 Profile of Buyers and Sellers, the share of sales to first-time buyers averaged 34 percent during the year, down one percentage point of 35 percent.  Still, given that the share of first-time buyers since 1981 has averaged 39 percent, builders have a unique opportunity to fill in the gap by focusing more on the Milllennial cohort.

One way builders are responding to Millennial demand includes building smaller single-family homes, with the median size falling by nearly four percent to 2378 square feet between the third quarters of 2014 and 2017. For multi-family homes, median home sizes fell by 1.5 percent during the same time period to 1168 square feet.

Even with these changes, however, the industry is still catching up from the Great Recession in many areas.  According to the National Association of Home Builders/First American Leading Markets Index (LMI) for the third quarter of 2017, markets in just 58 percent of the 337 metro areas nationwide returned to or exceeded their last normal levels of economic and housing activity, for a net gain of about 40 markets over the previous year.  Nationally, the index stood at 1.03, meaning that the nationwide average is running at 103% of normal economic and housing activity.

Nonetheless, the individual components of the LMI have not recovered equally: While employment has reached 99 percent of normal activity and home prices have rebounded to 155 percent of normal, single-family permits are running at just 56 percent of historic norms.

In order to address this disconnect between supply and demand, the Rosen Consulting Group recently conducted its own study for the NAR.  In its recent white paper “Rebuildingthe American Dream: Strategies to Sustainably Increase Homeownership,” Rosen’s team identifies 25 ideas to bolster homeownership.

While some suggestions are repeats of past ideas – such as addressing restrictive zoning laws, offering down payment savings programs, tackling the burden of student debt, and a nationwide counseling program for homeowners who previously experienced foreclosure and may be hesitant to consider buying a home again – others are more focused on emerging technologies in the industry or even re-thinking land use strategies.  These include promoting more pre-fabricated or modular housing, boosting training and apprenticeship programs, and more liberal use of Accessory Dwelling Units (ADUs), such as granny flats, on single-family lots in high-cost areas.

With new supply seemingly under assault from multiple causes, multiple solutions will likely be required.

FOMC meeting minutes reveal continued growth despite hurricane-related disruptions

The information reviewed for the October 31-November 1 meeting indicated that labor market conditions generally continued to strengthen and that real gross domestic product (GDP) expanded at a solid pace in the third quarter despite hurricane-related disruptions.

Al­though the effects of the recent hurricanes led to a reported decline in payroll employment in September, the unemployment rate decreased further. Retail gasoline prices jumped in the aftermath of the hurricanes, but total consumer price inflation, as measured by the 12‑month percentage change in the price index for personal consumption expenditures (PCE), remained below 2 percent in September and was lower than early in the year. Survey‑based measures of longer-run inflation expectations were little changed on balance...

The U.S. economic projection prepared by the staff for this FOMC meeting was broadly similar to the previous forecast. Real GDP was expected to rise at a solid pace in the fourth quarter of this year, boosted in part by a rebound in spending and production after the negative effects of the hurricanes in the third quarter. Payroll employment was also expected to rebound during the fourth quarter.

Beyond 2017, the forecast for real GDP growth was essentially unrevised. In particular, the staff continued to project that real GDP would expand at a modestly faster pace than potential output through 2019. The unemployment rate was projected to decline gradually over the next couple of years and to continue running below the staff's estimate of its longer-run natural rate over this period...

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

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2017 in Review: A Gradually Strengthening Economy Meets Higher Construction Costs

At this same time a year ago, I wrote about an economy that was improving enough that the Federal Reserve was about to raise interest rates for the second time since 2006, followed by up to three more hikes in 2017.  However, there has also been a consequence of this growth in the form of higher costs for land, labor and materials, making it challenging for builders to build the types of affordable housing at a time when new home starts are predicted to jump sharply in 2018.

U.S. GDP growth – which averaged about two percent in both 2015 and 2016 and was just 1.2 percent in 1Q 2017 ---- surged to three percent in the second and third quarters, due mostly to increased consumer spending, inventory investments, exports and federal government outlays.  Current forecasts are suggesting this rate of growth to improve even further to 3.3 percent in the final quarter of 2017.

Job growth, which rose by 261,000 in October, averaged 169,000 per month through the first ten months of 2017 (down 12.2 percent from the same period of 2016), and would likely have been higher without the negative impacts from a particularly harsh hurricane season.  Had job growth stayed on track with the average through August, job growth through October would have been closer to 185,000 jobs per month.  Moreover, October’s official unemployment rate of 4.1 percent is the lowest reported since December 2000.

Not surprisingly, consumer confidence from both The Conference Board and the University of Michigan surveys has risen to the highest levels since the early 2000s, boosted in large part by the strengthening job market.  In turn, wages have come under increasing pressure, with average hourly earnings up 2.2 percent for the 12 months ending in October.

Still, because the Federal Reserve-preferred PCE price index rose by just 1.6 percent per year through September, it’s not clear just how many interest rate increases we’ll see in 2018.  Complicating matters further are higher inflation indicators from both the Producer Price Index and Consumer Price Index, which rose by 2.6 and 2.2 percent per year through September, respectively.

Certainly one area in which we’ve seen higher inflation is in the cost for building a new single-family home, which as of September 2017 was up by 5.2 percent year-on-year and 29.2 percent over the previous five years.  Combine that increase with tight supply in most markets, and the result has been a decline in home affordability.

As of 3Q 2017, the NAHB/Wells Fargo Housing Opportunity Index fell to 58.3 percent, for the lowest rate since the same quarter of 2008, and down sharply from the last peak of 77.5 in 1Q 2012.  Since 3Q 2008, median national home prices tracked by the same report rose by 26 percent.

Single-family new home sales, which dipped in July and August, rebounded by nearly 19 percent in September to 667,000 per year, and were up 17 percent year-over-year.  So far in 2017, new home sales have averaged 609,000 per month, up nine percent from the same period of 2016.    At current sales rates, existing inventory would take 5.0 months to sell, down slightly from 5.1 a year ago.

For existing homes, lack of inventory at the lower end of the market and rising prices have recently stunted sales, with September’s pace down 1.5 percent from a year ago and the share of first-time buyers declining to 29 percent from 34 percent.

Although September’s inventory did rise slightly to 1.90 million homes – or a timeline of 4.2 months at current sales rates -- it has fallen year-over-year for 28 consecutive months. While pending home sales in September were flat from August, they were still down 3.5 percent from a year ago, and have fallen on an annual basis in five of the past six months.

Thankfully, there does seem to relief on the horizon.  Looking ahead to 2018, FreddieMac is predicting home builders to take up much of this slack in overall housing inventory.  Annualized housing starts, which averaged 1.19 million for the first nine months of 2017, are forecast to rise by another nine percent to 1.33 million in 2018, with total single-family home sales rising by about two percent to 6.30 million units even as mortgage rates trend slowly upward.

As for potential consequences of tax reform on the housing market, given the high level of push-back from multiple interest groups, and with the Senate and House versions still far apart as of mid-November, that analysis must wait for another day.

President Trump nominates Jerome Powell as new Fed Chair

From the New York Times:

Most expect Mr. Powell to maintain the slow but steady approach that Ms. Yellen has taken in raising rates and unwinding the portfolio of assets that the Fed purchased to boost the economy after the 2008 financial crisis. Mr. Powell remains a centrist voice in the Fed’s internal debates, arguing for the Fed to end its stimulus campaign at a slow and steady pace. Over the last year, that has placed him solidly among the majority led by Ms. Yellen.

“Our view is Powell is the G.O.P. version of Yellen, with the added kicker of wanting to reduce regulation,” said Tom Porcelli, chief United States economist at RBC Capital Markets. He said Mr. Powell was “the easy choice if you want to maintain continuity.”

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Fed opts to leave interest rates at current levels in latest meeting

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

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State Street Investor Confidence Index hits 6-month low on concerns about more hawkish Fed Chair

The State Street Global Investor Confidence hits 6-month low in October, declining by 7.5 points to 96.9. Confidence in all three regions drops amidst the increasing potential for a new Fed Chair.

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Federal Reserve meeting minutes indicates December interest rate hike is likely

Federal Reserve officials see the economy expanding at a steady clip and indicate that an interest rate hike later this year is a near lock, despite some divisions over where inflation is headed.

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Federal Reserve leaves interest rates unchanged for now, forecasts another raise this year

The Fed will start cutting its $4.5 trillion balance sheet in October, initially by just $10bn per month. The FOMC also left US interest rates unchanged, at 1.25% to 1.5%, but expects to raise them one more time this year, followed by three raises in 2018.

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Fed meeting minutes reveal concern about weak inflation and possible halt to interest rate hikes

Federal Reserve policymakers appeared increasingly wary about recent weak inflation and some called for halting interest rate hikes until it was clear the trend was transitory.  The minutes also indicated the Fed was poised to begin reducing its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities.

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Federal Reserve opts to keep interest rates at current levels until inflation is higher

The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term...

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation...

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June Federal Reserve meeting minutes shows split on inflation outlook and asset sales

Federal Reserve policymakers were increasingly split on the outlook for inflation and how it might affect the future pace of interest rate rises.

The details of the meeting, at which the U.S. central bank voted to raise interest rates, also showed that several officials wanted to announce a start to the process of reducing the Fed's large portfolio of Treasury bonds and mortgage-backed securities by the end of August but others wanted to wait until later in the year.

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Federal Reserve opts to hike key interest rate another 1/4 point

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

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Economic Update: Overall Improvement since the First Quarter of 2016

In its July monthly meeting, the Federal Reserve Open Market Committee – which decides on interest rate policy – left the door open to whether or not we’ll see another rate hike in 2016. The good news is that the expected impacts from Brexit have been largely subdued.  In addition, the economy seems to be on a more normal path, with both June and July showing monthly job growth of 255,000 to 287,000, and an official unemployment rate of 4.9 percent.

GDP, which was just 0.8 percent in the first quarter of the year, was initially reported to have risen to 1.2 percent by the second quarter.  Moreover, in mid-August, the Federal Reserve Bank of Atlanta had estimated third-quarter GDP growth at 3.6 percent, and boosted its forecast for residential investment growth from 0.4 to 2.4 percent.

Inflation is also stable, with the Consumer Price Index flat in July but rising by just 0.8 percent over the previous 12 months.  However, when subtracting out the more volatile indicators for food and energy, prices have risen by 2.2 percent over the previous year.  With an annual inflation target of 2.0 percent, should job growth reports remain positive in the coming months, then the Federal Reserve may hike interest rates before the end of 2016. Still, not all sectors of the economy are feeling the inflation pinch, with the Producer Price Index falling 0.4 percent in July and still down 0.2 percent for the previous 12 months, which is also why a rate hike is not a given.

For now, consumers remain cautious, with The Conference Board’s Consumer Confidence holding steady at just over 97 on a 100-point scale in July after rising in June.  This latest survey suggests that although the economy will continue expanding at a moderate pace, attitudes regarding the job market and personal incomes remain cautiously optimistic.

Builder confidence is also positive, rising by two points to 60 in August, in which anything over 50 is positive.  The index measuring current sales rose two points to 65, while the index for sales expectations over the next six months rose one point to 67.

In the commercial real estate sector, CoStar’s value-weighted U.S. Composite Index, which focuses on the sales prices of higher-quality assets, advanced by 3.3 percent during the second quarter of 2016, while the equal-weighted U.S. Composite Index, which includes more sales of smaller properties, rose 2.1 percent. While the office, industrial and retail indices all rose by 1.9 percent and the multi-family index increased by a close 1.8 percent, by far the most improved sector was hospitality, rising 4.5 percent to within one percent of its former peak.

Looking closer at housing, sales of new single-family homes rose for the fifth straight month in July to surpass 650,000 annual units, for a notable jump of over 31 percent from July 2015 and reaching the highest pace of new home sales since October 2007. In addition, at this sales rate, existing inventory would take just 4.3 months to sell, versus 5.2 months a year earlier, and falling to the lowest inventory level since June 2013. For all of 2016, the NAHB is forecasting single-family home starts to rise by about 10 percent, as those in the multi-family sector level off.  Nonetheless, future residential growth will continue to be hampered by shortages of labor and lots and higher regulatory costs.

In the existing home market, after four consecutive months of increases, July sales not only tumbled by 3.2 percent from June, but were also down 1.6 percent from the same month of 2015.  NAR is blaming this on a lack of affordably priced inventory, especially for starter condominium homes. As proof of this, the Wells Fargo Home Opportunity Index fell to 62.0 percent in the second quarter of 2016, the lowest rate since the third quarter of 2014. Over the last year, inventory levels have fallen by 5.8 percent and have declined year-over-year for the last fourteen months.  Consequently, with some buyers priced out of the market even at low interest rates, overall inventory levels would take 4.7 months to sell, up from 4.5 months in June.

Of course this demand for new supply is certainly good news for builders!  Although July housing starts were up 5.6 percent year-on-year, building permits inched up only 0.9 percent for the same time period. Yet given the challenges facing the industry including regulations, labor shortages and the difficulty finding affordably priced land, lack of available housing supply may be with us for some time.

Federal Reserve keeps interest rates at current levels but acknowledges improving economy

Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate.

Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. Household spending has been growing strongly but business fixed investment has been soft. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.

Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent.

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Federal Reserve votes to keep interest rates at current levels

The central bank decided not to raise interest rates Wednesday at the end of its two-day meeting. The decision was in line with expectations after a brutal May jobs report.

"The pace of improvement in the labor market has slowed," the Fed said in a statement. "Although the unemployment rate has declined, job gains have diminished."

The Fed cut its forecast for U.S. economic growth in 2016 to 2%, down from 2.2% earlier. This is the second time this year that the Fed is reducing its expectations for U.S. economic growth. The Fed also slightly decreased its projection for economic growth in 2017.

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Federal Reserve opts to keep interest rates at current levels at latest meeting

Amid a moribund economy and reduced levels of consumer spending, the Fed on again opted not to raise interest rates.

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Summary:  Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed.

Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft.

A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports.

Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.