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Wednesday, June 25, 2008

Economic Reports: FOMC and More

fomc policy
Today's economic reports included the FOMC interest rate decision and policy statement, durable goods orders and new home sales. While plenty eventful, the day offered no surprises.

FOMC Policy Decision

The Federal Reserve's Federal Open Market Committee (FOMC) today decided to keep its target for the Fed Funds Rate unchanged at 2%, as expected. Within its policy statement, the FOMC indicated that economic activity continues to expand, driven by some firming of household spending. This "spending," however is receiving significant and temporary boost from the economic stimulus package, and we hope the Fed is discounting that temporary reality.

The FOMC went on to qualify its positive note by pointing out ongoing financial market stress, tight credit conditions, housing contraction and softening labor market. It therefore sees limited economic growth this year.

Regarding inflation, the group expressed concern about elevated risks originating from energy and other commodities. After reminding us of the extensive actions they've taken so far, the governors stated that economic growth should continue and inflation should moderate. Finally, the Fed noted that while risks to economic growth seem to have eased, risks to inflation have intensified.

Thus, they've clearly marked the end of expansionary monetary policy, and signaled yet again the likelihood of future action to stymie inflation. Stocks rose into the news today, perhaps adjusting after having already discounted in higher inflation concerns. After the FOMC release, the S&P 500 initially moved lower but is relatively absent of significant reaction. There was no surprise in the statement, so stocks were already well-priced. However, we believe that as inflation concerns are more broadly digested by the market, stocks are likely to adjust lower on the near-term trend line.

Durable Goods Orders (May)

Durable goods orders posted their first monthly non-decline of the year, but the news was anticipated. We wrote about it ourselves in our "Week Ahead" piece. Economists were not surprised by the 0.0% change in monthly orders either.

Believe it or not, durable goods likely benefited from economic stimulus distribution. Despite the high-ticket cost of durables and anecdotal evidence of broad segment weakness and consolidation (i.e. in airlines and autos), the government's gift distribution of capital offered the still employed majority an opportunity to go out and make long desired purchases. However, we anticipate this month's bounce will prove just a blip in time, and not a turning point for new trend. Times will continue tough this year as inflation proves more stubborn than the Fed's initial estimate. It's also noteworthy that excluding defense and transportation, orders still fell 0.6%.

New Home Sales (May)

New home sales for May drifted further lower, sinking below expectations to an annual run rate of 512,000. This compared with April's rate of 526K, and marked the second lowest rate of sales in seventeen years.

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