Consumers, the Fed, and the President

It has been an interesting week in terms of economic news. The economic reports have included information about consumers, the Fed Open Market Committee and the President. Coming in to the week, the Fed meeting was expected to be the highlight of the economic calendar and it didn’t disappoint—even though it did just what everyone expected.

Before we get to the Fed meeting, let’s look at two different reports involving consumers. On Tuesday, the Conference Board released the results of the Consumer Confidence Index for September and it continued to climb. The reading came in at 138.4 and that was up from 134.7 in August. That August reading was also revised upward to that level from a previously reported 133.4.

The consumer confidence reading is the highest reading since November 2000. Consumer confidence started falling in December 2000 as the stock market started falling. The reading in November 2000 was 142.5 and there were six instances where the reading was over 140 that year. Those are the only readings over 140 in the history of the index.

I have written about the elevated consumer confidence readings before and from my studies, if the readings start falling, you should be concerned if they fall more than 10% from the high.

Another interesting report involving consumers was the New Home Sales report for August. The report showed a seasonally adjusted annualized rate of 629,000 and that was a big improvement over the 609,000 (revised) rate in July.

One of the areas of concern with the Fed raising interest rates has been a slowdown in the housing industry. While the few months prior to the August report did dip slightly, the trend in new home sales is still to the upside.

The chart is from Briefing.com, but I drew the trendline. As you can see, the slight dips this year haven’t been severe enough to break the trendline. With the Fed in a rate-hiking cycle, the concern has been that new home sales would drop sharply, but that hasn’t happened yet. Compared to historical rates, mortgage rates are still below the historical average.

I have argued in the past that the Fed should be more transparent about rate hikes as they could help create demand for major purchases such as homes and cars. If a consumer has been considering buying a new home or a new car, but has been putting it off, they would be more likely to act if they think rates are going up. In this sense the Fed could create greater demand for various goods and this would have a trickledown effect.

Moving ahead to the Fed meeting, the committee did what almost everyone expected and raised the target rate another 0.25%. Despite doing what everyone expected, there was a small knee-jerk reaction late in the day on Wednesday and stocks sold off in to the close. The reaction came due to the Fed removing one sentence from its policy statement. It removed the sentence, “The stance of monetary policy remains accommodative.”

Fed Chairman Powell tried to clarify the removal of the one sentence by stating that, “overall financial conditions remain accommodative.” He also added that “certain asset prices are looking toppy.”

Despite the Fed doing exactly what everyone expected, President Trump was quick to criticize the Fed rate hike. The president has been critical of previous rate hikes, but this time the criticism came just a few hours after the announcement.

“We are doing great as a country,” Trump said Wednesday at a press conference in New York. “Unfortunately they just raised interest rates a little bit because we are doing so well. I am not happy about that.”

While President Trump may not like the rate hikes, the Fed is mandated by Congress to focus on two things: full employment and stable prices. Given the expansion of the economy and the possible inflation caused by the tariffs the Trump administration has placed on various goods, the Fed seems to be focused on price stability currently.

When asked about pressure from the president to keep rates low, Fed Chairman Powell stated, “We don’t consider political factors. That’s who we are. That’s what we do. And that’s just the way it’s always going to be for us.”

President Trump can argue against rate hikes all he wants, but some of his policies have helped create the need for rate hikes. The tax cuts, the tariffs, the drive to get the GDP back above 4%… All of these goals and moves are working in a manner that is helping to improve the economy and drive prices higher. The Fed is simply acting in a manner that they believe will keep the bubble from bursting.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

One comment

  1. The old soft landing. Hope their plan works. The rate hiking cycles, money extinguishing exercises (Quantitative Tightening, as opposed to Quantitative Easing), which causes an inverted yield curve result in over reactions most of the time.

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