Fed Cites Economic Headwinds: The Weekly Market Update

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The Fed Keeps Rates Stable

The Federal Reserve Board’s decision not to raise interest rates last week was not a surprise by any means. After the weak jobs report for May, the decision was a no-brainer. Thus, the words of the Fed were more important than the decision to stand pat. In their statement, the Fed cut its forecast for U.S. economic growth in 2016 to 2%, down from 2.2% earlier. Chairperson Yellen pointed to “headwinds blowing on the economy” as a factor in this reduced outlook. In addition, the statement indicated that they “expect economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.” This means no increase now and less of a chance of an increase in July and possibly for September.

One factor the markets will be watching very closely will be any signs of the kindling of inflation. The Fed continues to have leeway, as long as there is no inflationary pressure. For the past year, we have had one important deflationary factor — plunging oil prices. Now that oil prices seem to have stabilized close to $50 per barrel, it is time to keep our eyes out for other evidence of rising prices. For example, while the retail sales report released last week was as expected, the news that import and export prices rose more than expected is important in this regard. Producer prices came in higher than expected last week as well.

Another factor affecting the markets is the referendum on Britain’s proposed exit from the European Union. Most economists have forecasted that such a move could throw the UK into recession. Though we will know the results of the referendum this week, any terms of a separation would still have to be negotiated. We do know that the markets do not like uncertainty and a vote to leave will leave the western world with plenty of uncertainty — another factor that could tie the hands of the Fed.

The Weekly Market Update

Rates fell to another three-year low in the past week. Freddie Mac announced that, for the week ending June 16, 30-year fixed rates fell to 3.54% from 3.60% the week before. The average for 15-year loans decreased to 2.81% and the average for five-year adjustables also fell to 2.74%. A year ago, 30-year fixed rates were at 4.00%, almost one-half of one percent higher than today's levels.

Attributed to Sean Becketti, chief economist, Freddie Mac -- "The 10-year Treasury yield continued its free fall this week as global risks and expectations for the Fed's June meeting drove investors to the safety of government bonds. The 30-year rate on home loans responded by falling 6 basis points for the second straight week to 3.54 percent -- yet another low for 2016. Wednesday's Fed decision to once again stand pat on rates, as well as growing anticipation of the U.K.'s upcoming European Union referendum will make it difficult for Treasury yields and -- more importantly -- rates on home loans to substantially rise in the upcoming weeks."

Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.