FOMC Keep Funds Rate Steady

August 12, 2008--Though the FOMC noted concerns over rising inflation, it decided to keep the federal funds rate steady at its latest meeting. Manufacturing again displayed its resilience in June at new orders surged. As fewer government rebates were mailed in June, personal income rose in June, after posting an increase of in May. Last, pending home sales grew in June, following an increase in May.

 

Federal Open Market Committee Meeting
The FOMC kept the federal funds rate at 2% for the second straight time, citing concerns over the weakening labor market and continued turmoil in financial markets. In the statement, the FOMC expects inflation to decline in the coming months, but stated "the inflation outlook remains highly uncertain."  Though the committee noted that the economy continues to expand, it expressed many concerns, specifically, the labor market, financial markets, restricted credit conditions, the housing downturn, and high energy prices. The committee appeared more cautious about the general economic outlook, but expects that "over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth." Moreover, the FOMC seemed worried about inflation and said “although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee." Looking ahead, the Fed will leave rates unchanged in the near term.

 

Factory Orders
New orders for manufactured goods surged 1.7% in June after rising 0.3% in May. Nondurable goods orders led the overall increase in Factory Orders, as it increased 2.5%, increasing on April’s growth of 1.7%. New orders for durable goods also increased in May, as it posted a 0.8% gain. Orders for core capital goods, which are a proxy for business investment spending increased at a rate of 1.2% for the month. Unfilled orders also grew at a rate of 0.9% for the second straight month.

 

Personal Income
In June, Personal Income rose a paltry 0.1% after surging 1.8% in May. The slower pace of growth in Personal Income is largely due to a reduction in the quantity of tax rebates being distributed. When excluding the tax rebates, Personal Income grew 0.3% in June and 0.4% in May. Spending growth rose 0.6% in June, though, real spending fell 0.2% in June, as prices increased significantly across the board. The saving rate was 2.5% in June, again, largely due to the dispersal of the tax rebates.

 

Pending Home Sales
The index for pending home sales increased 5.3% in June to 89.0 after rising 4.7% in May. The index is 12.3% lower from its June 2007 level. The data suggests that existing home sales should continue to be flat or in outright decline for the next few months, as the housing adjustment continues.