Economic Commentary for June 20th, 2014: No Surprises from Fed

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The two big economic reports over the past week, Retail Sales and CPI, roughly offset each other, leaving mortgage rates with little change ahead of Wednesday’s highly anticipated Fed announcement. The Fed statement was very similar to the prior one, though, and mortgage rates ended the week a little lower.
There were no major surprises in the Fed statement. The Fed continued to scale back its bond purchases by another $10 billion to $35 billion per month. The Fed funds rate was held steady and there was no change in the guidance for the timing of the first rate hike. Fed officials did reduce their forecasts for 2014 GDP growth and for the Fed funds rate over the long-term, which was slightly positive for mortgage rates.

This week’s major economic data did cause significant reactions in mortgage rates, but in opposite directions. May Retail Sales increased modestly from April, but the gains were smaller than had been anticipated by investors. Slower economic growth is favorable for mortgage rates, and rates improved on the news. Higher inflation is definitely not good for mortgage rates, however. After holding steady at lower levels since last summer, inflation rates have surprisingly jumped over the last two months. May CPI was 2.1% higher than one year ago. Core CPI, which excludes food and energy, was 2.0% higher than one year ago, up from an annual rate of 1.6% just two months ago. Core CPI has now reached the Fed’s stated target level for core inflation of 2.0%.

Looking ahead, investors will be very interested in the PCE price index, the Fed’s top inflation indicator, which will be released on June 26. The PCE index has been running a little slower than CPI, and investors will be watching to see if it follows CPI higher. Next week’s housing data, including Existing and New Home Sales, also will be important. The next Employment Report will come out on July 3. Outside the U.S., the violence in Iraq is the main focus right now.

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