As expected, the Fed raised the federal funds rate by 75 basis points, the largest increase since 1994, and indicated that many more rate hikes will take place in coming months. Chair Powell said that an increase of either 50 or 75 basis points was likely at the next meeting in July. The average of the “dot plot” forecasts from officials is that the federal funds rate will end the year at 3.40% and will reach a peak of 3.80% in 2023, which is significantly higher than the prior projections in March. Officials also lowered their forecasts for GDP growth in 2022 to 1.7% from 2.8%. One key takeaway was that the Fed intends to remain tough on inflation even if it slows economic growth.
Since consumer spending accounts for over two-thirds of US economic activity, it is an important indicator of the health of the economy. Retail sales were expected to post a slight gain in May, but instead fell 0.3% from April. The shortfall was primarily due to a sharp decline in vehicle sales, as well as reduced spending on furniture and electronics. Despite the negative reading in May, though, consumer spending was still a strong 8% higher than a year ago.
Home buyers desperately need more inventory in many regions, but the most recent data was disappointing. In May, housing starts fell 14% from April, far below the consensus forecast, to the lowest level since April 2020. Building permits, a leading indicator of future activity, also fell short of expectations with a 7% decline from April. Once again, builders reported higher prices and shortages for land, materials, and skilled labor as issues holding back a faster pace of construction.
Looking ahead, investors will continue to closely follow news on Ukraine and Covid case counts in China. They will also look for additional Fed guidance on the pace of future rate hikes and bond portfolio reduction. Beyond that, it will be a very light week for economic reports. Existing Home Sales will be released on Tuesday and New Home Sales on Friday. Mortgage markets will be closed on Monday in observance of Juneteenth.