The Fed Data Dependent, But Without All the Data…

Despite the jump in stocks after the Fed’s decision yesterday, Treasury yields held pretty steady. They’ve been steady since the governrnment shutdown began last month and have remained steady since it reopened.

The long-term yield fell to 2.9% the first trading day of the year, but rebounded to 3.1%.

Yesterday afternrnoon, the 30-year yield still stood at about 3.06%.

As expected, the Fed held steady on the federal funds rate at 2.25% to 2.5%. That’s the overnrnight interest rate the Fed charges member banks to borrow for reserve requirement shortfalls. The Fed tries to control long-term rates by manipulating the federal funds rate.

In its statement, the Fed said that: “In light of economic and financial developments, and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

The Fed noted that economic activity is rising. Jobs are strong. Spending grew stronger. And investments increased moderately. Inflation remains near the 2% target.

In other words, everything is just peachy!

The stock market received its late holiday gift from the Fed yesterday since it implied that future rate hike will be on a “wait and see” basis. The case for raising rates has weakened, even though a couple more hikes this year are still on the table.

The market was hoping for clarification about future balance sheet normalization.

Fed Chair Jerome Powell noted that the balance sheet will continue to be reduced, as per the current plan. But it will be larger than initial estimates. The Committee will finalize the end of balance sheet reductions at future meetings and is prepared to adjust normalization. That’s just what the market was looking for.

Treasury bonds have recently moved based on stock price fluctuations and global yield trends. They’ve lacked important economic data that has been delayed because of the governrnment impasse. The Census Bureau will be releasing updated data starting this week for November, though they have yet to say when Decembers’ economic releases will be out.

What wasn’t being funded during the shutdown were the Bureau of Economic Analysis (BEA), and the U.S. Census Bureau, among other agencies. These two agencies provide research for a variety of public and private organizations, one being the U.S. Federal Reserve.

Even though the above agencies didn’t update over a month’s worth of data in two days to provide the Federal Reserve with the information it needed to make its decision, the Fed did still meet and didn’t hike rates. This time, anyway…

About Those Houses…

I was wondering how the Federal Open Market Committee (FOMC) could vote or even discuss policy with a lack of updated new home sales data, retail sales figures, and durable goods orders from the Census Bureau.

Or talk about gross domestic product (GDP) updates. Or how the Fed will review its preferred inflation gauge – the personal consumption expenditure index (PCE Index). And not to mention how they’ll review personal income and spending figures, all of which come from the BEA…

Remember… the Fed is data dependent in its policy decisions and will be in the future, according to Fed Chair Jerome Powell.

There were a couple economic releases not affected by the shutdown last week.

One being December existing home sales. Existing home sales is a much larger number, but they don’t give the economy the boost from associated sales of appliances, furnrniture, and the like as new home sales do. Still… it’s a good indicator of where overall home sales are headed.

Sales were down 6.4% on the month and fell below 5 million units annualized. On the year, sales fell 10.3%. The median sales price fell to $253,600, or down 1.4%.

What should have helped…

Mortgage rates fell in December. That should have helped sales. But it didn’t.

Of course, the shutdown delayed closings for those getting FHA mortgages and other governrnment guaranteed loans.

U.S. pending home sales, out yesterday mornrning, fell 2.2% on the month and to the lowest level in five years. Sales were expected to rebound 0.5%.

Look for housing to get worse before it gets better. Even though new home sales figures have been delayed for two months, I expect it’s followed the existing home sales trend lower.

Don’t worry though, the Fed has your back! Mr. Powell assured us on a couple of occasions yesterday, that all the Fed cares about is using its policy tools correctly on behalf of the American people.

That’s reassuring…