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Economic Week in Review: Fed shows its hand

June 20, 2014

Amid turmoil in the Middle East and inflationary signs at home, Federal Reserve policymakers sent some strong signals about the future of interest rates and economic growth. A key indicator of the housing market hit a rough patch while leading economic indicators showed some improvement.

For the week ended June 20, the S&P 500 Index was up 1.4% to 1,963 (for a year-to-date total return—including price change plus dividends—of about 7.2%). The yield on the 10-year U.S. Treasury note was up 3 basis points to 2.63% (for a year-to-date decrease of 41 basis points).

Fed talks interest rates

Federal Reserve policymakers bumped up their projections for short-term interest rates in 2015 and 2016 while reducing estimates for the long term. In a statement released following the two-day meeting of the Federal Open Market Committee (FOMC), officials said they would continue winding down their monthly bond purchases by $10 billion in July. However, they still expressed concern for the U.S. economy.

In fact, the economy's first-quarter contraction caused policymakers to reduce their growth projections for 2014 to 2.2%—down from a 2.9% expansion estimate offered in March—while keeping estimates for 2015 and 2016 unchanged. Reflecting the sentiment that much of the weak first quarter was weather-driven, the official statement noted that underlying economic activity has rebounded since the previous FOMC meeting in April. "Labor market indicators generally showed further improvement," officials said. "The unemployment rate, though lower, remains elevated."

Commenting on inflation, Fed Chairwoman Janet Yellen said, "I think it's important to remember that, broadly speaking, inflation is evolving in line with the committee's expectations. The committee has expected a gradual return in inflation toward its 2% objective, and I think the recent evidence that we've seen—abstracting from the noise—suggests that we are moving back gradually, over time, toward our 2% objective."

"In their statement, the Fed anticipates the fed funds rate to remain low and below its long term rate for considerable time," said Vanguard economic analyst Vytas Maciulis. "Yet the Fed's published expectations regarding the future path of the policy rate changed a bit. Relative to earlier in the year, they now expect slightly higher interest rates at the end of 2015 and 2016 with a lower equilibrium level. This suggests the Fed may believe that the weak economy is the result of long-term structural factors rather than shorter-term cyclical issues."

Consumer prices jump

The Consumer Price Index (CPI) rose 0.4% in May, coming closer to a normal trend after weak period. It was the sharpest increase since February 2013 and came after prices increased 0.3% in April and 0.2% in March. Core CPI, which excludes oft-volatile goods such as food and energy, also rose 0.3%—the fastest increase since August 2011. On a yearly basis from last May, overall prices were up 2.1% and core prices 2%.

The Fed's annual inflation target of 2% generally is seen as an attempt to balance price stability and economic growth. Yet the central bank may have to consider raising short-term rates—starting with the federal funds rate—faster than expected if inflation continues to grow at its current pace.

Consumer Price Index

Housing starts drop

New-home construction fell 6.5% in May, the first decline in four months and further evidence of the housing industry's bumpy road to recovery. Single-family housing starts fell 5.9%, while multifamily dwellings were down 7.6%. Newly approved applications for building permits were down 6.4%, primarily because of the multifamily segment. The lone bright spot in the numbers came with single-family permits, which were up 3.7% to 619,000, the largest increase since September 2012.

Leading indicators up

The index of leading indicators from the Conference Board rose 0.5% in May, slightly below expectations but still the ninth increase in the past ten months. Seven of ten components were up, though a decline in building permits somewhat restrained the numbers. Consumers are sending mixed signals about the economy, as many said business activity improved from April while still expressing concern over the job market.

Industrial production rises

U.S. factories increased their output in May for the third time in the past four months, a sign that manufacturers may finally be thawing from the harsh winter freeze. Industrial production was up 0.6%, including a 1.5% increase in auto manufacturing, a 1.3% increase in mining output, and a 1.1% rise in machinery production. Capacity utilization edged up to 79.1% in May.

The economic week ahead

Next week's economic reports include sales of existing homes on Monday, new-home sales and consumer confidence from the Conference Board on Tuesday, durable-goods orders and GDP on Wednesday, and personal income on Thursday.

Summary of major economic reports
Date Report Actual
expected value
10-year note yield S&P 500 Index
June 16 Industrial Production (May)
Source: Federal Reserve Board
+0.6% +0.5% +1 bp +0.1%
June 17 Consumer Price Index (May)
Source: Labor Department
+0.4% +0.2% +5 bp +0.2%
  CPI, except food and energy (May)
Source: Labor Department
+0.3% +0.2%    
  New Residential Construction (May, annualized)
Source: Commerce Department
1,001,000 1,036,000  
June 18 FOMC Minutes
Source: Federal Reserve Board
–5 bp +0.8%
June 19 Initial Jobless Claims (week ended June 14)
Source: Labor Department
312,000 315,000 +3 bp +0.1%
  Leading Economic Indicators (May)
Source: The Conference Board
+0.5% +0.6%    
June 20     –1 bp +0.2%
      Weekly change +3 bp +1.4%

bp=basis points. 100 basis points equal 1%. For example, if a bond's yield rises from 5.0% to 5.5%, the increase is 50 basis points.


  • The economic statistics presented in this report are subject to revision by the agencies that issue them. For more information on the reports mentioned in this article, read our Guide to major U.S. economic reports.
  • All investing is subject to risk, including the possible loss of the money you invest.
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