Investors, rocked by a volatile stretch of trading in equity markets last week, will turn their attention this week to the Federal Open Market Committee’s (FOMC) September meeting, along with two key reports on the state of the consumer in the U.S.
The FOMC’s upcoming meeting Tuesday and Wednesday comes just weeks following the central bank’s annual economic policy symposium, during which officials announced a new framework to inform their thinking on rate-setting in light of inflation. The updated framework will allow for a moderate overshoot of their 2% inflationary target, alleviating the urgency for officials to step in and raise rates to stave off a run-up in inflation.
However, in announcing this decision, Federal Reserve Chair Jerome Powell omitted specifics on how the FOMC would achieve higher average inflation following years of undershooting its target, leaving the committee to discuss tactics at forthcoming meetings. Many economists expect details of the central bank’s means of implementing its new framework will remain elusive at the September meeting.
“We do not expect major policy innovations at the September FOMC meeting,” Nomura economist Lewis Alexander wrote in a note. “Recent comments from FOMC participants suggest a consensus for stronger, outcome-based forward guidance or significant changes to asset purchases remains some ways off.”
Namely, participants have not yet appeared to agree on the timing of when specific forward guidance should be offered, Alexander pointed out. In separate recent comments, Fed Governor Lael Brainard said the policies might be invoked in the “coming months,” and Chicago Fed President Charles Evans said these “could be beneficial in the not-to-distant future.” Others, however, have hinted at a less pressing timeline, with the Federal Reserve Bank of Cleveland’s Loretta Mester suggesting there may not be an “immediate need” for the move, and the Federal Reserve Bank of Atlanta’s Raphael Bostic telling the Wall Street Journal he didn’t “think we’re there right now.”
That said, FOMC officials’ discrete views on the path forward for interest rates in the mid- to longer-term will come into sharper relief with the central bank’s updated Summary of Economic Projections – or “dot plot” – set for release this week as well. Officials have so far telegraphed that the federal funds rate would hold at the zero bound through the forecast horizon of 2022, and the updated print is set to include officials’ outlooks through 2023.
In an NPR interview earlier this month, Powell signaled that a slow post-virus economic recovery and still-soft inflationary trends will mean that keeping rates at a zero bound “will be measured in years.”
“Consequently, we think the median dot will be at zero in 2023,” UBS economist Seth Carpenter said in a note. “To be sure, there will be others that are more optimistic and have liftoff in 2022 and 2023, but likely not the median and not the Fed leadership. The economic outlook that calls for such a stance is likely not much changed from the June projections.”
“The surprise decline in the unemployment rate in August will likely be discounted some, and we suspect that the last expansion’s 3.5% unemployment rate with below-target inflation will mean that any projected rise in inflation will be gradual,” Carpenter added.
Meanwhile, Powell’s press conference, scheduled to take place Wednesday afternoon following the conclusion of the monetary policy meeting, is expected to include remarks that strike a cautious tone on the pace of the economic recovery amid the ongoing pandemic, even as newly released economic data moves in a marginally more positive direction.
“The risk of another coronavirus wave as flu season approaches has been a recurring risk theme of late,” RBC Capital Markets economists wrote in a note Friday. “Ultimately, there is no upside for the committee to be positive at this juncture. They will continue to be cautious and, if wrong, nobody will care. Whereas if they turn positive and are wrong, it could be a disaster for credibility.”
“We expect a good portion of the Q&A during the press conference to focus on the recent changes to the monetary policy framework,” they added. “Most of what Powell touched on at Jackson Hole was very forward-guidance driven. So we will hear about 1) more willingness to let inflation run above 2% (the inflation averaging provisions) and 2) letting the unemployment rate drift well below the natural rate in the future (the de-linking of employment and inflation that Powell promoted). From our lens the recent tweaks are merely a concretization of an already active process.”
Retail sales, consumer sentiment
On the economic data front, the August retail sales report released on Wednesday will draw considerable attention, offering an updated view of the state of consumption at the end of the summer as shutdown orders abated further.
The pace of gains in month retail sales has slowed considerably from May’s record 18.2% urge. Retail sales in July rose 1.2% to pop back up above pre-pandemic levels, leaving “much less scope now for rapid monthly gains,” Michael Pearce, senior US economist for Capital Economics, said in a note Friday.
Consensus economists expect to see a 1.0% month-over-month rise in retail sales in August following a 1.2% gain in July. This would mark the fourth straight month of increases in monthly retail sales.
“Some sectors have continued to struggle and, following the renewed easing of restrictions as new virus cases have trended lower, there is scope for a stronger rise in spending at bars and restaurants in August,” Pearce added. “Clothing sales may also continue to catch up. But building materials probably continued to ease back after their earlier surge, while most other categories saw more modest gains.”
A separate report due out Friday will reflect the state of the consumer through a different lens. The University of Michigan is set to release its closely watched Surveys of Consumers, which is anticipated to show consumer sentiment ticked up only marginally to an index level of 75.0 in early September, from 74.1 in August. The index has been in a holding pattern since bottoming during the pandemic-period in April at 71.8, as consumers continue to cite concerns over the pandemic and the economic distress that has stemmed from it.
Tuesday: Empire Manufacturing, September (6.0 expected, 3.7 in August); Import price index, August month-on-month (0.5% expected, 0.7% in September); Export price index, August month-on-month (0.4% expected, 0.8% in July); Industrial production, August month-on-month (1.0% expected, 3.0% in July); Capacity utilization, August (71.5% expected, 70.6% in July)
Wednesday: MBA Mortgage applications, week ended September 11 (2.9% prior week); Retail sales, August advance month-on-month (1.0% expected, 1.2% in July); Retail sales excluding autos and gas, August advance month on month (0.9% expected, 1.5% in July); Business inventories, July (0.2% expected, -1.1% in July); NAHB Housing Market Index, September (78 expected, 78 in August); FOMC rate decision; Net long-term TIC flows, July ($113.0 billion in June); Total net TIC flows, July (-$67.9 billion)
Thursday: Building permits, August (1.52 million expected, 1.483 million in July); Housing starts, August (1.475 million expected, 1.496 million in July); Philadelphia Fed Business Outlook Index, September (15.0 expected, 17.2 in August); Initial jobless claims, week ended September 12 (850,000 expected, 884,000 prior week); Continuing claims, week ended September 5 (13.000 million expected, 13.385 million prior week)
Friday: Current account balance, second quarter (-$160.0 billion expected, -$104.2 billion prior week); Leading index, August (1.3% expected, 1.4% in July); University of Michigan Sentiment, September preliminary (75.0 expected, 74.1 in August)
Monday: Lennar (LEN) after market close
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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