The Federal Open Market Committee, the policy-making arm of the Federal Reserve, is convening today and will make statement including policy changes, if any, tomorrow afternoon. After the last meeting in August, the Fed announced that economic activity was leveling out. With recent improvements in some economic data points, the Street is probably expecting talk of recovery tomorrow. If the Fed’s outlook isn’t optimistic enough, it could be seen as a disappointment and put downward pressure on the market. In any event, the Fed is expected to make no changes to interest rates and to continue its program of buying back $300 billion worth of Treasuries, now nearly complete.
The Federal Housing Authority announced today that home prices in July rose 0.3 percent from June levels. However, the increase was less than expected and prices were still 4 percent worse than July 2008. Furthermore, the 0.5 percent rise initially reported in June was also revised downward to a 0.1 percent increase, reminding us that a fast recovery in the housing market isn’t likely in the works.
According to the National Association of Realtors, prices for this year are forecasted to fall some 13 percent on a yearly basis, an even larger decline than the 9.5 percent fall in 2008. Although there have been some positive signs of sales improvement in housing, much of the improvement can be attributed to the government $8,000 tax credit granted to first time homebuyers. First-time buyers have accounted for 43 percent of home sales since the credit came into effect. In the six weeks before that, the percentage was just 32 percent. The tax credit expires in November, but because it takes a couple of months to close a sale after a contract is signed, the deadline to agree to a sale is fast approaching. Without a helping hand from the government, it remains to be seen how the housing market will fare.
This week we also saw the Conference Board’s latest Leading Economic Index (LEI) reading, which increased 0.6 percent monthly. While the overall index has increased in four straight months (after falling for twenty consecutive months previously), looking deeper, we see that only five out of the ten indicators rose. Going back historically, no recession since the 1960s has ended without at least one month in which all ten leading indicators rose in unison. And of concern, the number of initial jobless claims rose again after a fall last month, and money supply fell again, indicating that job cuts remain a problem and the circulation of liquidity in the economy isn’t increasing.
Taking this all into consideration, economists don’t expect the Fed to raise rates tomorrow; we agree, and think the economy continues to face a bumpy road ahead.
