Fed Update: Goldilocks Economy So Far
A: Yesterday's Fed meeting ended as expected with interest rates staying put at 5.25%. The all important statement issued with this rate decision suggests that the goldilocks economy, which means strong growth and moderating inflation pressures, seems to be in place thus far. However, the fed is still keeping an eye on future inflation risks and re-iterated that '...the extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information".
Goldilocks Economy - A term used to describe the U.S. economy of the mid- and late-1990s as "not too hot, not too cold, but just right." An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. Some economists consider this optimal, and in such situations the government usually decides not to undertake any policy measures to improve macroeconomic performance.
The economy seems very strong these days which was confirmed by recent data and predicted by the runup in equity prices 3-6 months ago. Remember that equities are a leading indicator of the economy and corporate profits; so when stocks ran-up as they did from AUG-DEC of 2006 it should be expected that good economic data was soon to come. And it is coming right now. Question is, what happens next?
FED ON HOUSING & ECONOMIC GROWTH
Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters.
FED ON INFLATION RISKS
Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.
The Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
Quick Tip: The fed's primary role is to combat inflation pressures and maintain pricing stability through monetary policy. Any change in monetary policy affects how expensive money is to borrow and in a rising interest rate environment (which is what we experienced over past few years) consumers will realize higher minimum payments on their credit card bills, higher mortgage rates, and higher payments on other debts.
Here is a chart of what the fed has done with monetary policy since 2004 & what the Dow Jones Stock Index performed along the way:
What You Need To Know: The fed has done a terrific job of battling inflation pressures and averting a recession due to the lack of a highly restrictive policy and statement on interest rates & future policy. Props to Ben Bernanke on a great first year as fed chief. However, we are NOT out of the woods yet. Expect rates to stay at this level and possibly be raised a bit more by years end if inflation pressures remain. Right now, I notice:
1. Energy Prices Are Rising Again - Oil Prices Rise Above $58/Barrel
2. Core PCE is Still Above Fed's Comfort Zone of 1-2% - US Core PCE Grows 2.2% on Year
3. Housing Showing Signs of Stabilization - Treasury prices Down on Housing Report
...all of which lead me to believe that there is no way the fed will lower rates anytime soon. As long as the economy is strong, housing news isn't horrible, and inflation pressures remain homeowners might have to deal with short term ARM's resetting into a higher rate and future homeowners finding money a bit more expensive to borrow than the past 3-4 months. Something to keep an eye on as I will continue to report on this very crucial fundamental that ultimately affects housing's affordability on the open market.
