Federal Reserve decision, housing data: What to know this week

·Reporter
·7 min read

Investors' main focus this week will be on the Federal Reserve's September monetary policy meeting, which will set the stage for more debate around the timing of tapering and the outlook for the economy. Other economic data out this week will focus on the housing sector. 

Federal Open Market Committee (FOMC) members are set to kick off their two-day meeting on Tuesday, with the event culminating with their monetary policy statement and press conference from Federal Reserve Chair Jerome Powell on Wednesday. 

For market participants, the big question has been around when the Fed will formally announce the timing of and then actually begin tapering their crisis-era asset purchase program, or quantitive easing (QE). For more than the past year, this has comprised the Fed buying $120 billion per month in agency mortgage-backed securities and U.S. Treasuries. The Fed has suggested it is looking for "substantial further progress" toward its employment and inflation goals before beginning to pare back this pandemic-era support system. 

"COVID caution and a jobs data miss mean the Federal Reserve will leave policy on hold next week, but with inflation staying elevated and the growth outlook remaining good we expect a more explicit acknowledgement that QE tapering will start this year," said James Knightley, chief international economist for ING, in a note on Friday. 

The September meeting will also include updates to the FOMC's Summary of Economic Projections, wherein members will chart their expectations for economic conditions and interest rates over the next couple years. And notably, the September projections will be the first to include expectations for 2024.

"If these projections remain consistent with the June estimates, the backdrop for the economy and equity markets will remain very favorable," Larry Adams, chief investment officer for Raymond James' private client group, wrote in a note on Friday. "Why? Assuming the Fed maintains its economic growth of 3.3% for 2022, growth expected next year would be nearly double the growth level generally deemed as a ‘good’ or ‘average’ year of economic growth."

"If the 2022 unemployment rate (June estimate: 3.8%) and core inflation (June estimate: 2.1%) are relatively unchanged, it would signal that the labor market is expected to edge closer to its pre-COVID levels and that the recent spike in inflation was truly transitory," he added.

Based on the most recent projections from June, the median FOMC member expected real GDP to rise by 7.0% in 2021 and 3.3% in 2022, and for core personal consumption expenditures to rise by 3.0% in 2021 and 2.1% in 2022. The FOMC's "dot plot," or chart of interest rate expectations, suggested the median member expected two rate hikes by the end of 2023. 

Federal Reserve Board Chairman Jerome Powell testifies on the Federal Reserve's response to the coronavirus pandemic during a House Oversight and Reform Select Subcommittee hearing on Capitol Hill in Washington, DC, June 22, 2021. (Photo by Graeme Jennings / POOL / AFP) (Photo by GRAEME JENNINGS/POOL/AFP via Getty Images)
Federal Reserve Board Chairman Jerome Powell testifies on the Federal Reserve's response to the coronavirus pandemic during a House Oversight and Reform Select Subcommittee hearing on Capitol Hill in Washington, DC, June 22, 2021. (Photo by Graeme Jennings / POOL / AFP) (Photo by GRAEME JENNINGS/POOL/AFP via Getty Images)

"The big story could be the Fed individual dot forecasts for interest rate increases," ING's Knightley added. "Currently seven out of 18 officials are going for 2022 as the starting point for increases and we could conceivably see one or two more bring their forecast forward to 2022. We suspect the median stays at 2023 for now, but it will be a close call."

At least as it relates to near-term policy, mosts economists are not expecting a formal announcement of tapering at the September meeting, especially after the weaker-than-expected payrolls print out in the Labor Department's August jobs report suggested the labor market was only slowly trudging back to pre-pandemic conditions. 

"Given the soft jobs report we did get, getting one or two more extra jobs reports is going to give them that much more comfort that they're in the right position. And that's the reason why we favor the December meeting as the timing for the taper announcement," Seth Carpenter, global chief economist at Morgan Stanley, told Yahoo Finance Live last week.

"But I think one key thing to keep in mind is that the Fed policymakers really have in their minds [that] tapering QE is not outright tightening — it is adding accommodation at a slower pace," he added. "So as a result, I don't think they need to see the economy going at full bore for them to taper purchases."

Housing data 

A slew of new housing market data is also due for release this week. Most of the reports are expected to point to a deceleration in housing sector activity, reflecting weakness due to both ongoing supply chain shortages and rising home prices. 

Tuesday's report from the Commerce Department on August building permits and housing starts is likely to come in mixed, with building permits swinging to a monthly decline as materials shortages weigh on future construction. 

Consensus economists expect building permits to drop by 1.8% in August after rising by 2.3% in July, reaching a seasonally adjusted annualized rate of 1.600 million, according to Bloomberg consensus data. Housing starts, however, are expected to climb modestly by 1.0% following a 7.0% decline in July, though this would still keep new-home building at its lowest level since April. 

Wednesday's existing home sales report from the National Association of Realtors is also expected to reflect more weakening in the sector, with sales anticipated to fall on a monthly basis for the first time since May. Specifically, economists are looking for a 2.1% drop in existing home sales for August following a 2.0% monthly rise in July, which would bring the pace of sales to a seasonally adjusted annualized rate of 5.86 million. 

"We expect existing home sales to slow down to 5.80 million in August, from 5.99 million previously," Bank of America economist Michelle Meyer wrote in a note on Friday. "July's pickup in home sales was likely supported by an improvement in supply, as months' supply was still able to increase to 2.6. However, demand continued to outpace supply, pushing prices to another all-time high."

"The housing market may have cooled compared to earlier this year, but still remains competitive," she added. 

Economic calendar

  • Monday: NAHB Housing Market Index, September (74 expected, 75 in August)

  • Tuesday: Housing starts, month-over-month, August (1.0% expected, -7.0% in July); Building permits, month-over-month, August (-1.8% expected, 2.3% in July); Current Account Balance, Q2 (-$191.0 billion expected, -$195.7 billion in Q1) 

  • Wednesday: MBA Mortgage Applications, week ended September 17 (0.3% during prior week); Existing home sales, month-over-month, August (-2.0% expected, 2.0% in July); FOMC policy decision

  • Thursday: Chicago Fed National Activity Index, August (0.50 expected, 0.53 in July); Initial jobless claims, week ended September 18 (320,000 expected, 332,000 during prior week); Continuing claims, week ended September 11 (2.665 million during prior week); Markit Manufacturing PMI, September preliminary (60.5 expected, 61.1 in August); Markit Services PMI, September preliminary (55.0 expected, 55.1 in August); Leading Index, August (0.6% expected, 0.9% in July)

  • Friday: New home sales, month-over-month, August (0.1% expected, 1.0% in July) 

Earnings calendar 

  • Monday: No notable reports scheduled for release

  • Tuesday: AutoZone (AZO) before market open; Aurora Cannabis (ACB), FedEx (FDX), StitchFix (SFIX), Adobe (ADBE) after market close

  • Wednesday: Rite Aid (RAD), General Mills (GIS) before market open; BlackBerry (BB), KB Home (KBH) after market close

  • Thursday: Darden Restaurants (DRI) before market open; Costco (COST), Nike (NKE), Vail Resorts (MTN) after market close

  • Friday: No notable reports scheduled for release

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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