Vital Statistics:
Stocks are higher this morning after Donald Trump brokered a ceasefire agreement between Iran and Israel. Bonds and MBS are up.
Jerome Powell heads to the Hill today for his semiannual Humphrey-Hawkins testimony. I don’t see the prepared remarks released anywhere. I suspect the Democrats will focus on Fed independence while Republicans will advocate for lower rates.
Another Fed Governor (Michelle Bowman) set the table for rate cuts in a speech yesterday.
In considering the risks to achieving our dual mandate, I fully supported the revised characterization of uncertainty and the balance of risks in our most recent monetary policy statement, pointing to the diminished uncertainty and removing the emphasis on risks to both sides of our mandate. In my view, it was appropriate to recognize that the balance of risks has shifted. In fact, the data have not shown clear signs of material impacts from tariffs and other policies. I think it is likely that the impact of tariffs on inflation may take longer, be more delayed, and have a smaller effect than initially expected, especially because many firms front-loaded their stocks of inventories. And, all considered, ongoing progress on trade and tariff negotiations has led to an economic environment that is now demonstrably less risky. The change in our monetary policy statement appropriately incorporates this shift in the balance of risks as well as the rapid improvement in many measures of uncertainty.
As we think about the path forward, it is time to consider adjusting the policy rate. As inflation has declined or come in below expectations over the past few months, we should recognize that inflation appears to be on a sustained path toward 2 percent and that there will likely be only minimal impacts on overall core PCE inflation from changes to trade policy. We should also recognize that downside risks to our employment mandate could soon become more salient, given recent softness in spending and signs of fragility in the labor market.
It will be interesting to see if more Fed Governors start breaking ranks after Friday’s PCE Price Index report. The Street is looking for a 0.1% increase in the headline and core numbers (flat compared to April) and for the YOY number to increase to 2.3% and 2.6% respectively.
Existing home sales rose 0.8% MOM to a seasonally adjusted annual rate of 4.03 million units according to the National Association of Realtors. On a YOY basis, sales fell 0.7%. For-sale inventory increased 6.2% to 1.54 million units, which represents a 4.6 month supply at current levels. Inventory rose 20% on a YOY basis.
Activity was highest in the Northeast, where sales rose 4.2% and median home prices rose 7%. In the West, sales and prices fell.
“The relatively subdued sales are largely due to persistently high mortgage rates. Lower interest rates will attract more buyers and sellers to the housing market,” said NAR Chief Economist Lawrence Yun. “Increasing participation in the housing market will increase the mobility of the workforce and drive economic growth. If mortgage rates decrease in the second half of this year, expect home sales across the country to increase due to strong income growth, healthy inventory, and a record-high number of jobs.”
The increase in inventory is encouraging because it demonstrates the decline in the rate lock-in effect.
