The Federal Reserve will hold its final Federal Open Market Committee meeting of 2018 next week where the group is expected to raise interest rates once more this year. However, what has happened these last few weeks with regard to inflation may prove for interesting commentary as it relates to raising rates in 2019.
Wholesale inflation has slowed again, helped by a sharp decrease in energy prices. Wholesale gasoline prices saw their biggest drop in nearly three years with a 14 percent cost decrease. Natural gas prices also fell by a large margin—28 percent.
The large drop in energy prices was offset by a 0.1 percent increase in the producer price index for November (PPI), bolstered by rising costs of services. Many economists had predicted no change or even a decrease.
The report on the PPI from the Bureau of Labor Statistics shows that wholesale inflation has slowed from 2.9 percent to 2.5 percent over the past year. That’s nearly a full point drop from just a few months ago when the wholesale inflation rate hit a high of 3.4 percent.
The Consumer Price Index was also unchanged in November, seasonally adjusted. The Core CPI, that excludes energy and food prices, increased by 0.2 percent last month. Over the last 12 months, Core CPI is up 2.2 percent.
That slow down in inflation is expected to have an effect on the Federal Reserve’s decisions about raising rates in 2019. The Fed uses the personal consumption expenditures price index (PCE) as their preferred measure of inflation. October’s PCE, which excludes food and energy, increased by just 1.8 percent in October. That was its smallest gain since February. That’s yet another sign that inflation has softened.
Increased competition and decreased demand
Fannie Mae’s fourth quarter 2018 Mortgage Lender Sentiment Survey showed a weak report from lenders. Citing increased competition and declining loan demand, Fannie Mae’s survey showed mortgage lenders reporting net negative profit margin outlooks for the ninth consecutive quarter.
However, Fannie Mae’s chief economist seemed bullish on what 2019 could bring, noting that mortgage rates seem to have stabilized while home price gains have slowed down. Both could be indicators of a more robust housing market in the coming months.
Politics proves volatile on wall street
As it often happens, Wall Street reacted time and time again this week to varying political issues, both domestic and international.
With news of positive trade talks between the United States and China, futures traded higher on Wednesday while the Dow regained some losses. The yield on the 10-year Treasury note sat relatively unchanged, leaving long-term mortgage rates well below the high of 5 percent reached earlier this year. With the FOMC meeting happening next week, there is still a window of opportunity for people looking to refinance or lock in a purchase rate before rates go back up as they’re expected to do.
The bump in equities happened a day after the S&P 500 hit correction territory. Looking at it in the short term, a correction seems portentous. However, our economy has been riding high for so long that this correction, and continued volatile trading, have yet to make a distinct impact for the worse. Since the recession ten years ago we have seen multiple corrections and none have resulted in significant downturns.
The New York Times looked deeper into the history of corrections and recessions and found “In the last 20 years, there have been 10 corrections. Only two turned into a bear market, defined as a decline of 20 percent from its high, amid the recessions that began in 2001 and at the end of 2007.”
Adding to the tumultuous trade deal between President Trump and Chinese President Xi Jinping, is the uncertainty about Brexit.
U.K. Prime Minister Theresa May won a vote of confidence earlier this week which means her leadership cannot be challenged for at least one year. However, that did not solidify economic plans. The pound reacted well to the vote but May’s Brexit deal with Europe is not fully supported by Parliament. There will likely be continued volatility on that end as their government works on a deal.