Federal Reserve policymakers started their two day meeting to decide the future direction of monetary policy amid conflicting pressures of politics and economics.
On Tuesday, President Donald Trump said he wanted to see the Federal Open Market Committee deliver a “large cut” in interest rates at the conclusion of the meeting. He added that he wanted the U.S. Central Bank to stop the reduction of its balance sheet
“President Trump clearly is looking to shift blame at a time when the U.S. economy has failed to hit the much touted 3% GDP target, dampened by uncertainty stemming from trade disputes and tariffs" said Mark Hamrick, Senior Economic Analyst at Bankrate.com. "The reality is that to many Americans, monetary policy is a distant consideration even though it has dramatic impacts on their personal finances.
“The irony, of course, is that Chairman Jerome Powell was nominated by Trump himself, as he resisted the easy choice which would have been to reappoint Obama nominee Janet Yellen," Hamrick said. "Despite the president's attempts to politicize the Fed, members of the policy-setting Federal Open Market Committee will do that they believe to be in the best interest of the economy longer-term, not because the president is using his platform to pressure them.”
Most Fed observers expect the FOMC to cut the benchmark rate by 25 basis points, the first decrease in over a decade. And some say a 50 basis point cut would not be out of the question.
"President Trump’s incessant badgering of the Fed may have unintended consequences," said Donald Ellenberger, senior portfolio manager at Federated Investors. "Powell and the rest of the FOMC may feel compelled to lower rates only 25 basis points instead of 50 basis points just to assert the Fed’s independence from the White House."
Yet economic data released on Tuesday showed a U.S. economy that is still showing strength after a record expansion.
Core personal consumption expenditures, which exclude food and energy components, rose 0.2% in June, the Commerce Department reported. The core PCE is up 1.6% on a year-over-year basis. The broader PCE increased 0.1% in June and 1.4% annually. The core PCE is the Fed’s preferred measure of gauging underlying inflation in the U.S. economy. And June’s report indicated that inflation is heading back toward the central bank’s target rate of 2%.
Also in June, personal income increased 0.4% as disposable personal income climbed 0.4%. “The increase in personal income in June primarily reflected increases in wages and salaries, government social benefits to persons, and supplements to wages and salaries,” Commerce said in a statement.
Consumer confidence rose last month to its highest level this year. The Board’s consumer confidence index rise to 135.7 in July from 124.3 in June.
“After a sharp decline in June, driven by an escalation in trade and tariff tensions, consumer confidence rebounded in July to its highest level this year,” said Lynn Franco, the Board’s senior director of economic indicators.
Respondents’ feelings about present-day conditions improved in July. Those saying business conditions are “good” increased to 40.1% from 37.5% even as those saying business conditions are “bad” also increased to 11.2% from 10.6%. Their appraisal of the job market was also more favorable with those saying jobs are “plentiful” increasing to 46.2% from 44.0% while those claiming jobs are “hard to get” fell to 12.8% from 15.8%.
“Consumers are once again optimistic about current and prospective business and labor market conditions,” Franco said. “In addition, their expectations regarding their financial outlook also improved. These high levels of confidence should continue to support robust spending in the near-term despite slower growth in GDP.”
Pending home sales rose 2.8% in June, marking two straight months of growth, the National Association of Realtors reported. The Pending Home Sales Index, which is based on contract signings, increased to 108.3 in June from 105.4 in May. Year-over-year contract signings were 1.6% higher, snapping a 17-month streak of annual decreases.
The gains can be attributed to the current favorable conditions and predicted the rise is likely the start of a positive trend for home sales, said the NAR's chief economist Lawrence Yun.
“Job growth is doing well, the stock market is near an all-time high and home values are consistently increasing," Yun said. "When you combine that with the incredibly low mortgage rates, it is not surprising to now see two straight months of increases.”
Meanwhile, the S&P CoreLogic Case-Shiller’s National Home Price Index for May showed price growth continued to slow for the 14th straight month. “The U.S. housing market cool-down continued in May, signaling the longest period of price growth anemia since the Great Recession,” said Dr. Ralph B. McLaughlin, deputy chief economist at CoreLogic. “However, coupled with the recent drop in mortgage rates and incomes rising faster than inflation, the transition to a more balanced market should allow the industry to enter a period of sustainability into the foreseeable future.”
The FOMC is scheduled to release its decision on rates at 2 p.m. ET on Wednesday with Chairman Jerome Powell holding a news conference at 2:30 p.m. The FOMC won’t update its quarterly forecasts, including the dot plot of interest-rate projections, until the next meeting in September.
