Economic Commentary for February 26th, 2015: Rates Improve on Yellen Comments


While the Greek negotiations caused some market volatility, the big mover this week was Fed Chair Yellen. After several weeks of rising mortgage rates, Yellen’s bond-friendly comments caused rates to move a little lower over the past week.

The primary message from Yellen’s testimony to Congress was that future policy will depend on the performance of the economy. Yellen explained that the Fed can remain “patient” in raising the fed funds rate (and thus tightening monetary policy) because inflation remains below the Fed’s target level of 2.0% and the labor market contains enough slack to allow room for further improvement without causing inflationary pressures. After her comments, investor expectations for the first fed funds rate hike moved farther in the future.

Greek and Eurozone officials reached an agreement to extend Greece’s aid package, which was set to expire at the end of February. The four-month extension will give Greece and its creditors more time to work out a longer-term solution. The deal removes some uncertainty from the financial markets or at least pushes it off for a while.

The housing data released this week contained mixed news. Existing Home Sales declined in January, partly due to a lack of inventory, while New Home Sales remained near multi-year highs. Although both reports cover the month of January, they provide a different view of housing market activity. Existing Home Sales reflects closings, while New Home Sales measures signed contracts, so New Home Sales reflects more current activity.

Looking ahead, two big inflation reports will be released. The Consumer Price Index (CPI), the most-closely watched monthly inflation report, will come out on February 26. CPI looks at the price change for finished goods which are sold to consumers. Another measure, which is a favorite of the Fed, is the Core PCE price index and it will come out on March 2. In addition, Pending Home Sales and revisions to fourth quarter GDP will be released on February 27. The next Employment Report will come out on March 6.