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The economic discussion this week focused on the Fed and on trade. Several members of the Federal Open Market Committee delivered speeches or made statements...

Comerica Economic Weekly, November 30, 2018

November 30, 2018
By Robert A. Dye, Ph. D., Daniel Sanabria

The economic discussion this week focused on the Fed and on trade.

Several members of the Federal Open Market Committee delivered speeches or made statements this week, including FOMC Chair Jay Powell. Also, the minutes for the FOMC meeting of November 7/8 were released.Three important conclusions can be drawn from a week of Fedspeak. First, the Fed is comfortable with “gradualism” in the near term. Gradualism has come to mean a 25 basis point increase in the fed funds rate every other FOMC meeting. We expect to see the fourth such rate hike this year at the conclusion of the December 18/19 FOMC meeting. This will put the fed funds rate range at 2.25-2.50 percent on December 19. The implied probability of a December 19 rate hike has increased to about 83 percent.

The second important conclusion is that the Fed thinks that the fed funds rate range is getting closer to “neutral.” At “neutral,” it will be neither stimulative for the overall economy, nor restrictive. Of course, no one knows exactly where the neutral rate is. It can only be guessed at with a combination of objective and subjective reasoning. Also, one person’s “neutral” may be another person’s “restrictive.”

Third, the Fed is getting closer to changing the cadence of rate hikes. We expect the Fed to break the recent cadence of one 25 basis point rate hike every other FOMC meeting sometime in 2019. If conditions in key sectors, like housing, deteriorate, the Fed will break their cadence sooner and pause their tightening strategy. If inflation picks up, the Fed may break the cadence later. Bear in mind that beginning in January, Jay Powell will give a press conference at the conclusion of all eight FOMC meetings in 2019, not just at the current four. This will make all eight meetings “live,” with possibilities of a change in fed policy.

The U.S., Mexico and Canada have all signed their new trade agreement. It still must be approved by the legislative bodies of all three countries after a period of public comment and legislative debate.

Also, the Trump Administration has hinted that some movement is possible on the apparently deadlocked trade discussion with China. The G-20 meeting in Buenos Aires that is currently underway offers the opportunity for high-level discussion if that is what leaders want.

U.S. economic data this week was mixed. Housing-related data shows that many regional housing markets are clearly cooling. Housing affordability is taking a hit as mortgage rates increase and labor and materials costs increase for new construction. New home sales fell hard  by 8.9 percent in October, down to a 544,000 unit annual rate, the weakest annualized rate since March 2016.

According to the Case-Shiller U.S. National Home Price Index, house prices were up in September by 5.5 percent over the previous 12 months. That was the smallest year-over-year gain since December 2016. Among the cities in the Case-Shiller 20-City Composite Home Price Index, only Las Vegas is showing double digit year-over-year gains, up 13.5 percent in September. Previously hot West Coast markets are coming down to earth.

General Motors announced the closures of 5 plants in the U.S. and Canada in 2019, impacting as many as 15,000 workers.

For a PDF version of this report, click here: Comerica Economic Weekly, November 30, 2018.

The articles and opinions in this publication are for general information only, are subject to change, and are not intended to provide specific investment, legal, tax or other advice or recommendations.  The information contained herein reflects the thoughts and opinions of the noted authors only, and such information does not necessarily reflect the thoughts and opinions of Comerica or its management team.  We are not offering or soliciting any transaction based on this information.  We suggest that you consult your attorney, accountant or tax or financial advisor with regard to your situation.  Although information has been obtained from sources we believe to be reliable, neither the authors nor Comerica guarantee its accuracy, and such information may be incomplete or condensed.  Neither the authors nor Comerica shall be liable for any typographical errors or incorrect data obtained from reliable sources or factual information.