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The Federal Reserve dominated economic news this week as it released its policy announcement on Wednesday.



Comerica Economic Weekly, March 22, 2019

March 22, 2019
By Robert A. Dye, Ph.D., Daniel Sanabria

The Federal Reserve dominated economic news this week as it released its policy announcement on Wednesday. Treasury bond yields fell after the new dot plot signaled no Fed rate hikes for 2019. 

The Conference Board’s Leading Economic Index for the U.S. improved in February, breaking a four-month string of flat-to-down months that started last October. The Leading Index increased by 0.2 percent in February, pushed by the rally in stock prices. The Coincident Index also increased by 0.2 percent in February, driven by personal income. The Lagging Index was unchanged in February, breaking a string of four consecutive positive months. All in, the three indexes show slower, but ongoing, momentum for the U.S. economy through the first quarter.

Initial claims for unemployment insurance fell by 9,000 for the week ending March 16, to hit 216,000. Continuing claims fell by 27,000 for the week ending March 9, to hit a very low level of 1,750,000. The claims data is consistent with a rebound in job creation in March. 

Sales of existing homes jumped by 11.8 percent in February, to a 5.51 million unit annual rate as buyers took advantage of lower mortgage rates. This is the highest sales rate since March 2018. The median sale price of an existing home increased by 3.6 percent in February over the previous year. The inventory of unsold homes dropped from 3.9 to 3.5 months’ worth in February.

Total mortgage applications increased by 1.6 percent for the week ending March 15, led by a 3.5 percent gain in refis. Purchase apps inched up by 0.3 percent.  On a four-week moving average basis refis were down 2.6 percent from a year ago, while purchase apps were up 1.6 percent over the previous 12 months. According to the Mortgage Bankers Association, the rate for a 30-year fixed rate mortgage fell to 4.55 percent.

As widely expected, the Federal Reserve left the fed funds rate range unchanged at 2.25-2.50 percent on March 20. The policy announcement contains the now familiar “patient” language that the Fed first rolled out in December. The economic commentary in the policy announcement was slightly downgraded from the policy announcement of January 30. The median projection of real GDP growth for 2019 was downgraded from 2.3 percent from last December, to 2.1 percent. This is the Fed’s second consecutive downgrade of expected GDP growth for 2019. The new dot plot is consistent with zero rate hikes in 2019 and just one more rate hike over 2020 and 2021. The vote on the policy decision was unanimous.

The Fed also released more details on balance sheet normalization. The Fed now plans to begin reducing the pace of balance sheet reduction this May and conclude the reduction of Treasury bonds on its balance sheet at the end of September 2019. Reduction of agency debt and MBS will continue past September. As roll-off of maturing assets tapers down, the Fed will invest maturing principal across a range of Treasury bond maturities consistent with the composition of maturing Treasury bonds outstanding. 

The flash purchasing managers’ index for German manufacturing for March fell to a five-year low of 47.7, indicating modest contraction.  The gloomy German economic data brought the 10-year Bund yield down to negative 0.01 percent at the end of the week. This put further downward pressure on U.S. Treasury bond yields. A weaker German economy will have a ripple effect on the rest of Europe. This news will tend to keep European Central Bank monetary policy more accommodative, which, in turn, will tend to reinforce the Federal Reserve’s expected flatline on the fed funds rate this year.

For a PDF version of this report, click here:  Comerica Economic Weekly, March 22, 2019

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