Comerica Economic Weekly, June 17, 2021

Robert A. Dye, Ph.D.

,

Daniel Sanabria

Federal Reserve Building

U.S. economic news this week was dominated by the Federal Reserve with the release of a new monetary policy statement on Wednesday...



U.S. economic news this week was dominated by the Federal Reserve with the release of a new monetary policy statement on Wednesday, a new Dot Plot, a new summary of economic projections and a press conference by Fed Chair Jay Powell. 

The Fed left the benchmark fed funds rate near zero and will continue to purchase assets at the rate of at least $120 billion per month for the time being. While leaving policy tools unchanged, the Fed did make a “technical” adjustment, increasing both the interest rate on excess reserves and the overnight reverse repurchase rate by 5 basis points each.

The new Dot Plot does show a marginal shift in FOMC members expectations about the fed funds rate. The previous Dot Plot showed seven dots above the zero lower bound for the end of 2023. The new Dot Plot shows a majority of thirteen dots above the zero lower bound. The Fed is not admitting it yet in their official collective policy statement, but individual FOMC members are thinking about lift-off from the zero lower bound coming sooner then they did last March. 

In the new summary of economic projections, the median forecast for core PCE inflation for 2021 increased from 2.2 percent to 3.0 percent, and the median forecast for 2022 increased from 2.0 percent to 2.1 percent. Also, the Fed expects GDP growth to slow down significantly next year as the impulse from fiscal stimulus fades.

In his press conference, Chair Powell admitted that inflation could turn out to be more persistent than expected and that may require an adjustment to monetary policy. When pressed further about the Fed’s framework for evaluating the persistence of inflation, Powell declined to provide an objective standard. 

We expect the Fed to begin to wind down asset purchases by the end of this year. Chair Powell said that the Fed wants the winddown to be orderly, methodical and transparent, coming with ample advance notice. 

The Producer Price Index for Final Demand increased by a hot 0.8 percent in May. Headline PPI was up 6.6 percent over the year ending in May. After falling in April, energy prices were up by 2.2 percent at the producer level in May. Wholesale food prices gained 2.6 percent. Trade margins expanded by 0.7 percent. Core PPI (less food energy and trade) was up by 0.7 percent, showing broad-based inflation at the producer level. For the year ending in May, core PPI was up by 5.3 percent. 

The Conference Board’s U.S. Leading Economic Index for May increased by a strong 1.3 percent after similar strong gains in March and April. 

Retail sales fell by 1.3 percent in May, weighed down by auto sales, which declined by 3.7 percent on a nominal dollar basis. The surge in retail sales that came with fiscal stimulus direct payments to households in March sets the overall second quarter up to post a strong gain in consumer spending. However, within the second quarter momentum has clearly diminished for retail sales. 

Initial claims for unemployment insurance unexpectedly increased by 37,000 for the week ending June 12, to hit 412,000. We expect the walkdown in claims that began in February to continue as most states begin to roll back enhanced unemployment benefits. 

U.S. industrial production increased by 0.8 percent in May as manufacturing output increased by 0.9 percent. Motor vehicle assemblies improved in May to a still-soft 9.85 million unit annual rate.

U.S. housing starts increased by 3.6 percent in May to a 1,572,000 unit annual rate. This is still within the range established late last year. Total permits eased by 3.0 percent to hit a 1,681,000 unit annual rate, noticeably below the recent January peak rate of 1,883,000. 



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June 17, 2021
Robert A. Dye, Ph.D., Senior Vice President and Chief Economist at Comerica Bank

Robert A. Dye, Ph.D.

Senior Vice President and Chief Economist
Daniel Sanabria, Senior Economist at Comerica Bank

Daniel Sanabria

Senior Economist

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