3/18- Weekly Economic Highlights

3/18- Weekly Economic Highlights

The Federal Open Market Committee (FOMC) met this week and struck a hawkish tone. Fed Chair Powell and the FOMC emphasized the strong labor market as well as concerns about the impact of elevated inflation and the tragic Russian invasion of Ukraine in their statement. As a result, they raised the federal funds rate by 0.25% to a range of 0.25 - 0.50%, which was widely expected by the market. There was one dissenting vote from James Bullard, who favored a 50 basis point rate hike in addition to implementation of a balance sheet reduction plan. Fed Chair Powell suggested that balance sheet runoff could begin as early as their next meeting in May, sooner than previously anticipated, and that the pace of the unwind will likely be faster than in the previous quantitative tightening cycle. The dot plot favors six additional rate hikes in 2022, which implies a 25 basis point rate hike at each remaining meeting this year, but the Fed hasn’t ruled out incorporating one or more 50 basis point hikes to address inflation. The FOMC’s Summary of Economic Projections forecasts higher Personal Consumption Expenditure (PCE) inflation this year at 4.3% and a lower growth rate of 2.8% real GDP.

Chandler’s view is that the Fed will continue to tighten at its May and June meetings, but that monetary policy is not on a pre-set course and that the cadence and magnitude of rate hikes in the second half of this year will be highly dependent on how economic and geopolitical conditions evolve. As the Fed hikes rates, that will be a drag on both economic growth and inflation levels in the second half of 2022. Chandler also believes that the Fed will be watching the yield curve to avoid an inversion where short term rates are higher than long term rates, which historically has been a key predictor of recession.

US Treasury rates moved higher and the yield curve flattened after the FOMC meeting, with the 2-year Treasury note closing at 1.94%, the 5-year at 2.18%, and the 10-year at 2.19% on Wednesday. According to a Freddie Mac survey, the average rate on 30-year fixed rate mortgages rose above 4% for the first time since 2019 this week.

Existing home sales declined 7.2% in February to an annualized rate of 6.02 million units. On a year-over-year basis, existing home sales were down 2.4%. Record low inventory levels and robust demand have pushed prices higher, causing affordability issues for many prospective home buyers.

Retail sales edged up 0.3% in the month of February, less than expected, and increased 17.6% year-over-year. Gains on gas stations, food services and drinking places were major drivers of growth as the US economy recovered from the pandemic. Although the February data disappointed, January retail sales were revised higher to +4.9%. The US consumer’s balance sheet remains strong but there are signs that higher gas prices are taking a toll on discretionary spending and consumer confidence.

The Leading Economic Indicators Index (LEI) was up 0.3% in February, for an increase of 7.6% year-over-year. Although this metric is in positive territory following a January decline of 0.50%, the Conference Board acknowledged that this does not fully reflect the impact of the Russian invasion of Ukraine on global supply chain issues, shortages, and the resulting soaring prices.

Next Week:

Chicago Fed National Activity Index, New Home Sales, Durable Goods, Purchasing Managers’ Index, University of Michigan Sentiment Index

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© 2022 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. Data source: Bloomberg and the Federal Reserve. This report is provided for informational purposes only and should not be construed as specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as an indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation, or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest rate, credit, and market risk. Interest rate risk: The value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low-rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market, in general, could decline due to economic conditions, especially during periods of rising interest rates.