FOMC holds target range steady, releases economic projections

Prior week summary

The major U.S. equity indices moved lower for a third consecutive week as mixed economic data releases and stalled stimulus bill negotiations soured investor sentiment. Market participants received a deluge of economic data updates throughout the week that largely pointed to a mixed recovery of the U.S. economy. The Empire Manufacturing Index rose 13.3 points in August to 17.0, reversing the 14-point drop seen in July and smashing calls for a 6.0 reading. The Philadelphia Fed Business Outlook Survey also topped expectations, posting a 15.0 level in August. While the August reading is below the 17.2 level seen in July, many of the components of the index, including new orders, shipments, and the six-month business outlook, surged in August. The encouraging signals sent from both the Empire Manufacturing Index and the Philadelphia Fed Business Outlook Survey come after the national ISM Manufacturing Index posted its best level in two years this August. Retail sales increased 0.6% in August, rising for the third consecutive month, but below both analyst expectations and the 0.9% pace seen in July. While the rebound in retail sales has been an encouraging sign for the U.S. economy, analysts warn that sales may slow in the coming months as many Americans continue to struggle financially as a result of the pandemic and the expiry of the $600 per week enhanced unemployment coverage at the end of July.

The FOMC held its two-day policy meeting last week and, as expected, opted to leave the target range unchanged at 0%–0.25%. In a statement released with the decision, the FOMC said, “The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.” Two committee members voted against the decision with Robert Kaplan preferring that “the Committee retain greater policy rate flexibility” and Neel Kashkari preferring that, “the Committee indicate that it expects to maintain the current target range until core inflation has reached 2% on a sustained basis.” The Federal Reserve also released their economic projections at the conclusion of the meeting with 13 of the 17 Federal Reserve officials seeing no interest rate hikes through 2023.

Stimulus bill negotiations continued last week as Republicans and Democrats worked to reach an agreement on a fifth COVID-19 relief bill. After the Senate failed to pass a “skinny” $300B proposal last week, the Problem Solvers Caucus, a bipartisan group composed of members of the House of Representatives, unveiled a $1.5T relief plan on Tuesday that would include direct payments to Americans of $1,200. Senior Democrats have pushed back on the plan issuing a statement after the proposal was released saying, “When it comes to bolstering the public health system, supporting state and local governments and assisting struggling families, the Problem Solvers’ proposal leaves too many needs unmet. With the general election just 49 days away and the Postal Service sabotaged by the Trump administration, their proposal also abandons our responsibility to protect the life of our democracy.” White House Chief of Staff Mark Meadows appeared more confident following the release of the bipartisan proposal saying that he is, “probably more optimistic about the potential for a deal in the last 72 hours than I have been in the last 72 days,” and noted, “I think it at least provides a foundation for us to come back to the table.”

The look forward

In a light week for economic data releases, market participants are looking forward to updated figures on existing home sales, new home sales, jobless claims, and durable goods orders, among others. A host of Federal Reserve officials hold speaking engagements throughout the week including Federal Reserve Chair Jerome Powell who testifies on Tuesday and Wednesday before two committees within the House of Representatives.

Rates snapshot

Market implied policy path (Overnight indexed swap rates)