Stimulus to Jumpstart, Stabilize Growth

This morning, Chinese officials?announced sizable plans to jumpstart growth and aid the nation’s weakened housing market.?According to reports, central bank authorities reduced the?reserve requirement ratio to the lowest level since 2020, as well?as the seven-day reverse repo rate from 1.7% to 1.5%. The package also includes measures to lower overall mortgage costs and ease rules for second-home purchases.

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A series of weaker-than-expected data, including the latest read on Q2 GDP at 4.7% on an annual basis, underscores the notion of a relatively weak consumer, mounting debt problems and a lingering property crisis. The package is aimed to increase confidence and help the country meet and maintain?its growth target of around 5%.?

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Back in the U.S., the policy debate continues regarding potential monetary policy “stimulus” and the longer-run trajectory of rates. Following September’s pivot, the direction of travel has been clearly indicated, but when it comes to the speed of adjustment and just how low rates will travel, the Fed is far from one mind.?

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Speaking yesterday, Atlanta Fed President Raphael Bostic underscored the motivation for a 50bp cut as a meaningful move towards neutral as the risks between employment and inflation come into better balance. Speaking at a virtual European Economics and Financial Centre event, Bostic went on to warn, however, that policy is not on a predetermined pathway and policy makers should not commit to a particular cadence of moves going forward as uncertainty remains in the evolution of the data as well as over where the so-called neutral rate truly is. “My residual concern about inflation might have led me to settle on a relatively small first move last week—say, 25 basis points. But such a move would belie growing uncertainty about the trajectory of the labor market,” Bostic said.

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Echoing Bostic’s call for a slower, more tempered pace of rate cuts, Minneapolis Fed President Neel Kashkari said he expected to lower rates by smaller, 25bp increments going forward. Speaking to CNBC, Kashkari said,?“After 50 basis points, we’re still in a net tight position so I was comfortable taking a larger first step. As we go forward, I expect, on balance, we will probably take smaller steps unless the data changes materially.”

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Taking a more aggressive and notably dovish position, Chicago Fed President Austan Goolsbee championed the Fed’s latest outsized cut and said further aggressive action is warranted. Speaking Monday at the National Association of State Treasurers Annual Conference, Goolsbee said he sees many more rate cuts over the next year, as interest rates need to be lowered “significantly” to protect the U.S. labor market and support the U.S. economy. “As we’ve gained confidence that we are on the path back to 2%, it’s appropriate to increase our focus on the other side of the Fed’s mandate — to think about risks to employment,” Goolsbee said.

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Continuing the array of Federal Reserve commentary,?speaking earlier today at a Kentucky Bankers Association event, Fed Governor Michelle Bowman noted that upside risks to inflation remain.?“Turning to the risks to achieving our dual mandate, I continue to see greater risks to price stability, especially while the labor market continues to be near estimates of full employment,”?Bowman said. She also commented on her dissenting vote last week, noting that in her view?“beginning the rate-cutting cycle with a quarter percentage point move would have better reinforced the strength in economic conditions, while also confidently recognizing progress toward our goals.”

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Indeed, as previously noted, the risk with a larger 50bp cut was always inadvertently sending an inappropriate signal of the Fed’s intentions to rush back to point of supporting the economy, as opposed to simply unwinding policy firming towards neutral as inflation moves closer to the target level.?

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Yesterday, on the economic calendar, the Chicago Fed National Activity Index increased from -0.42 to a reading of +12 in August, surpassing the expected gain to -0.20 and the highest reading in three months. The Chicago Fed Index draws on 85 economic indicators; a reading below zero indicates below-trend growth in the national economy and a sign of easing pressures on future inflation. In August, 36 of the 85 monthly individual indicators made positive contributions, while 49 made negative contributions.

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Also yesterday, the S&P global U.S. manufacturing PMI unexpectedly fell from 47.9 to 47.0 in the preliminary September report, the lowest reading since June 2023. According to the median forecast, the Manufacturing PMI was expected to rise to 48.6. The services PMI, meanwhile, slipped from 55.7 to 55.4, a two-month low, and composite PMI declined from 54.6 to 54.4 in the preliminary September report.

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This morning, the FHFA House Price Index rose 0.1% in July, a tenth of a percentage point less than expected and following no change the month prior.

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In addition, this morning, the S&P Case-Shiller 20 City Home Price Index increased 0.27% in July, less than the 0.40% gain expected and the smallest monthly gain since January. Meanwhile, the National Home Price Index rose 0.18% for the second consecutive month. Over the past 12 months, the 20-city index rose 5.88%, an eight-month low, while the national index gained 4.93%, the weakest increase in nine months.

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Also, this morning, the Richmond Fed Manufacturing Index unexpectedly fell by two points from -19 to -21 in September, the lowest reading since May 2020. According to the median forecast, the index was expected to rise to a reading of -12. In the details of the report, the volume of new orders increased by three points to -23, and wages rose by one point to +15 in September, the highest in two months. On the other hand, shipments fell from -15 to -18 in September, capacity utilization fell three points to -20, and the number of employees plunged from -15 to -22.

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Finally, this morning, consumer confidence, according to the Conference Board, unexpectedly fell 6.9 points from 105.6 (revised up from 103.3) to a reading of 98.7 in September, the largest drop since August 2021 and a five-month low. According to the median forecast, a reading of 104.0 was expected. In the details of the report, a gauge of current conditions decreased from 134.6 to 134.4, a two-month high, and a gauge of future expectations declined from 86.3 to a reading of 81.7 in September, a two-month low.

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Tomorrow, weekly mortgage applications and August new home sales will be released.

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Later in the week, on Thursday, weekly jobless claims, along with a highlight for the week – the final Q2 GDP print. GDP was unexpectedly revised higher from a 2.8% gain to a 3.0% annual rise in the second-round release, the largest gain in two quarters. In the final edition, Q2 GDP is expected to be revised down slightly to split the difference at 2.9%, still marking a two-quarter high.

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Also on Thursday, August durable goods orders, along with pending home sales, and the Kansas City Fed Manufacturing Activity Index.

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Wrapping up the week, on Friday, we’ll take a look at the August personal income and consumption report, along with the PCE – the Fed’s preferred inflation gauge. Personal consumption is expected to rise 0.3% in August and 5.0% on an annual basis, a potential downtick from the 5.3% annual gain in July, albeit still very solid on a nominal basis and well within the range established since May 2023. Income, meanwhile, is expected to rise 0.4% in August and 4.4% year-over-year, also marking a potential downtick from the July pace of 4.5%.?

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The PCE is expected to rise 0.1% in August following a 0.2% gain the month prior, and 2.3% on an annual basis, potentially marking a two-tenths of a percentage point decline from the pace reported in July. Stripping out food and energy, the core PCE is expected to rise 0.2% in August, following a similar gain the month prior, and potentially increase 2.7% year-over-year. In this case, this would mark a potential uptick from the 2.6% annual increase in July, and certainly a disappointing reality in the wake of the latest September rate cut announcement.?

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Also on Friday, wholesale inventories, and the final University of Michigan Consumer Sentiment Index read for September.?

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-Lindsey Piegza, Ph.D., Chief Economist