Little Change in Rates
This week's economic news contained few surprises. Fed Chief Bernanke gave no indication of policy changes and President Obama's jobs package matched expectations. As a result, mortgage rates ended the week with little change, remaining at historically low levels.
The basic issue confronting the US economy is slow economic growth with high unemployment. Both Fed officials and lawmakers would like to boost economic growth, but the challenge is figuring out how to accomplish this. Thursday, Fed Chief Bernanke stated that the Fed will consider additional stimulus at its next meeting on September 21, but he gave no indication whether the Fed will take action. The consensus view is that additional monetary stimulus from the Fed would have a limited impact on the economy. Fed officials are deeply divided about whether to ease policy to help as much as possible or whether the negative consequences in terms of higher future inflation and financial market distortions are too high a price to pay. This week alone, two Fed officials publicly stated that monetary policy has little ability to help the job market under current economic conditions, while another official came out strongly in favor of additional monetary stimulus to lower the unemployment rate. In any case, the next Fed meeting may be a very significant event for mortgage rates.
Lawmakers are also faced with the difficult task of weighing the costs and the benefits of different programs to lift the economy. On Thursday, President Obama proposed a $447 billion package of tax cuts and new spending to stimulate the economy and create jobs. The debate next moves to Congress. The government has spent an enormous amount of money over the last few years on stimulus programs, and analysts disagree about their effectiveness. Given the high level of government debt, there is greater resistance now to spending more money for uncertain results.
Also Notable:
The Fed's Beige Book reported that economic activity was sluggish in most regions of the US
As expected, the European Central Bank (ECB) made no change in rates
Officials stated that Greece is not at risk of leaving the EU
The Treasury will auction $66 billion in 3-yr, 10-yr, and 30-yr securities next week
Week Ahead
The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of "intermediate" goods used by companies to produce finished products and will come out on Wednesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Thursday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Retail Sales will be released on Wednesday. Retail Sales account for about 70% of economic activity. Industrial Production, another important indicator of economic growth, will come out on Thursday. Consumer Sentiment, Import Prices, and Philly Fed will round out the schedule. There will be Treasury auctions on Monday, Tuesday, and Wednesday.
