Weekly Market Update: September 26, 2016
What We Learned Last Week
The Fed saw a case for a rate increase but decided “for the time being” to wait for more evidence, perhaps because it had not fully prepared the market for such an action. The dovish President of the Federal Reserve Bank of Boston joined two other dissenters in favor of rate increase. He signalled that response in an earlier speech when he said, “a failure to… (gradually remove) accommodation could shorten, rather than lengthen, the duration of this recovery (if overly-lax policy leads to new financial excesses).”
The frequently-heard “lukewarm” description of recent economic data exaggerates the small “soft” pieces of the puzzle and underweights the strong signal coming from jobless claims, which is a snapshot of the entire economy.
Chair Janet Yellen was asked at her press conference why Fed policymakers assume the appropriate federal funds rate down the road should be close to 3 percent when they predict real Gross Domestic Product (GDP) will grow only 2 percent for the foreseeable future. The short answer is: why did the economy almost fully recover in seven years from the worst recession in memory with real GDP growing only 2 percent annually? In other words, the evolution of the job market offers the best insight into the health of the economy and potential inflation pressures.
What We Expect to See in the Week Ahead
The week’s economic calendar includes a rash of second-string indicators on housing and durable goods, and it includes the broadest estimate of consumer activity in August.
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