Some signs of budging
Trying to figure out the upcoming actions of the Federal Reserve has been super topical recently because of the close (generally inverse) relationship between inflation and interest rates. So, when you’re worried about inflation increasing too much, you could increase interest rates to decrease inflation. The Fed has been pretty steadfast in its belief that the higher inflation coming through the remainder of this year is going to be transitory in nature (vs. a more permanent issue that needs to be addressed with a policy change like increasing interest rates). However, the latest meeting minutes indicated that if the economy continues to recover aggressively, there’s a chance that Fed officials could tighten policy slightly by reducing its asset purchases (which controls the money supply in the market).
Moral of the story: Chairman Powell reiterated that the economic recovery is still fairly uneven (still long way to go for leisure and hospitality to recover), and “far from complete,” which means drastic policy changes from the Fed are still unlikely in the near future.
New lows
New unemployment claims continue to fall to pandemic lows. Last week’s filings came in at 444k, down from 478k the week before, and the lowest since the week of March 14, 2020. At this time last year, new claims were coming in at 2.3m (wild). The total number of people getting some form of unemployment benefits fell almost 900k to about 16m.
Moral of the story: Despite the disappointing April jobs report, weekly claims data indicate the labor market recovery is still chugging along. Between our daily pace of vaccine administration and the CDC’s encouraging masking guidance updates, we should hopefully see a steady reopening of the economy (and recovery of the labor market) throughout the rest of the year.
It might get crazier
Stocks took a slight tumble after the latest housing starts data that indicated (unsurprisingly) soaring materials prices (lumber, appliances, etc.) caused housing starts to fall 13.4% in April. Supply chain constraints, which feel like a terrible hangover from COVID, are really holding back housing starts that should honestly be picking up given the demand we’re seeing in the face of an improving job market and low mortgage rates.
Moral of the story: The strong housing market was a big part of our really strong first quarter economic growth. If the housing market is handcuffed by supply, not only will that flow through into lower GDP numbers, but will also meaningfully contribute to the rising inflation (low supply plus high demand means higher home prices). The housing market has been bananas, and this lack of supply isn’t going to help it calm down anytime soon. The real game changer here will be higher mortgage rates (when the Fed starts raising rates) that would dampen demand.