Fed won't cut yet, but Wall Street's counting on it down the road

Despite some hope from coked-up traders for a rate cut, the Federal Reserve kept interest rates the same on Wednesday. However, the Fed did mention that recent developments allowed it a bit more flexibility, ad they opened the door for stepping in if the economy gets worse.

The Federal Reserve on Wednesday left a key interest rate unchanged and signaled it’s unlikely to cut borrowing costs in 2019, but the central bank also left itself wiggle room by saying it would “closely monitor” the economy in light of waning inflation and growing “uncertainties.”

After a two-day meeting, the Fed held its benchmark fed funds rate steady between 2.25% and 2.5%. The Fed said the labor market “remains strong” and the economy continues to expand at a “moderate” pace….

Still, the Fed also acknowledged “uncertainties” have increased in the past month and a half, alluding to a widening rift between the U.S. and China on trade that’s hurt American manufacturers, farmers and exporters. Hiring in the U.S. also slowed sharply in May.

At the same time, inflation has tapered off and is running below the 2% level the Fed considers healthy for the economy. The central bank cuts its forecast for inflation in 2019 using its preferred gauge to 1.5% from 1.8% — well below its 2% target.

It’s worth noting that the Fed also said it “will act as appropriate to sustain the expansion,” which may be a way to get President Trump to back off of his criticism, as Trump wants lower rates and a more Bubblicious economy for the next 16 months.

The Fed still projected real GDP growth of 2.1% for 2019, but lower inflation would likely make things feel more stagnant, especially since much of the lower inflation would likely come from declining food and gasoline prices that will lead to more layoffs in those industries.
Meanwhile, the everyday economy still seems to be slowing down in the 2nd Quarter of 2019. An example is the recent housing numbers from the Census Bureau, which didn’t seem like much to me.

Building Permits
Privately owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 1,294,000. This is 0.3 percent (±1.3 percent)* above the revised April rate of 1,290,000, but is 0.5 percent (±1.4 percent)* below the May 2018 rate of 1,301,000. Single-family authorizations in May were at a rate of 815,000; this is 3.7 percent (±1.2 percent) above the revised April figure of 786,000. Authorizations of units in buildings with five units or more were at a rate of 442,000 in May.

Housing Starts
Privately-owned housing starts in May were at a seasonally adjusted rate of 1,269,000. This is 0.9 percent (±12.9 percent)* below the revised April estimate of 1,281,000 and is 4.7 percent (±8.9 percent)* below the May 2018 rate of 1,332,000. Single-family housing starts in May were at a rate of 820,000; this is 6.4 percent (±9.5 percent)* below the revised April figure of 876,000. The May rate for units in buildings with five units or more was 436,000.

Housing Completions
Privately-owned housing completions in May were at a seasonally adjusted annual rate of 1,213,000. This is 9.5 percent (±13.7 percent)* below the revised April estimate of 1,340,000 and is 2.8 percent (±9.1 percent)* below the May 2018 rate of 1,248,000. Single‐family housing completions in May were at a rate of 890,000; this is 5.0 percent (±12.7 percent)* below the revised April rate of 937,000. The May rate for units in buildings with five units or more was 319,000.

And yet I was reading things about how “great” this report was. Really? Compared to where we were 4 months ago, home building is still worse off, and not by a little.

Seasonally-adjusted change from January 2019-May 2019
New building permits
Jan 2019 1,317,000
May 2019 1,294,000 (-1.7%)

New housing starts
Jan 2019 1,291,000
May 2019 1,269,000 (-1.7%)

Housing Completions
Jan 2019 1,261,000
May 2019 1,213,000 (-3.8%)

And as you see above, those housing completions tanked in May after having a rate of more than 1.33 million for the 3 months before it.

The bond market sure seemed to think things were slowing, as interest rates dropped across the board, and the benchmark 10-year note fell another 3 basis points to end up below 2.03%. It also keeps us well into rate inversion, which as mentioned before, has meant recession within 12-18 months over the last 30 years.

I think the Fed recognized that because we aren’t plunging below 1% growth, they did not need to panic people about the overall economy (which an immediate rate cut would signal). But the Wall Streeters seemed to like the admission that later rate-cut action may well be taken, so they pumped up stocks more this week. As a result, the disconnect between a stagnant Main Street and a higher Wall Street is likely to grow even wider, if that’s possible.