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Economic & Housing Weekly Note

Federal Reserve Sticks to a 'Wait and See' Approach

December 13, 2019

Key Takeaways

  • The Federal Open Market Committee (FOMC) decided at its December meeting to maintain the target federal funds rate at 1.625 percent, as expected.
  • Retail sales rose 0.2 percent in November, albeit less than expected, and growth in core retail sales decelerated to 3.2 percent on a year-over-year basis for the third month in a row.
  • Small business optimism rose 2.3 points to 104.7 in November, with the net share of businesses reporting higher earnings this quarter turning positive for the first time since August 2018 and the share of businesses planning capital expenditures in the near future rising for the third month in a row.
  • Homeowners’ equity in real estate as a percent of household real estate value fell approximately two-tenths in the third quarter, reflecting an increase in single-family mortgage debt outstanding.
Forecast Impact

Given the Fed's belief that current policy is appropriate to sustain the expansion and our positive outlook for the economy, we removed our expectation of a rate cut in early 2020. We now expect the Fed to hold rates steady for all of next year, barring a "material reassessment" of its current stance. One such reason for the Fed to reassess their policy may be a slowdown in consumption. Retail sales were weaker than expected in November, suggesting that Q4 PCE growth may be slightly slower than we previously forecast, though consistent strength in labor markets and wage gains should continue to support consumers heading into 2020. The increase in firms' planning capital expenditures is a positive sign for business fixed investment, which we expect to add to growth in Q4 for the first time since Q1.

Dovish FOMC Lowers Federal Funds Forecast for 2020


Headline and Core Retail Sales Increase in November, October Sales Revised Upward

Details on Key Takeaways and Other Releases

  • In its post-meeting statement, the FOMC cited the positive November labor report and continued strength of incoming economic data in deciding to maintain the current federal funds rate target. The FOMC affirmed that it "judges that the current stance of monetary policy is appropriate" to sustain the expansion, but muted inflation pressures remained a concern in the Committee's statement. Since September, the FOMC's median projection for the 2020 federal funds rate has decreased significantly and now shows no movement from the current level.
  • The Consumer Price Index (CPI) rose 0.3 percent in November and 2.1 percent from a year ago, the fastest pace in a year, and rising above 2.0 percent for the first time since November 2018. Core CPI increased 0.2 percent in November, and 2.3 percent from a year ago.
  • Total retail sales rose 0.2 percent, driven by sales at vehicle dealers, gasoline stations, and non-store retailers, which rose 0.5, 0.7, and 0.8 percent, respectively. Excluding motor vehicles and parts, sales rose by 0.1 percent. Sales at furniture, electronic, and appliance stores increased by 0.4 percent, partially recovering from a drop in October. Core retail sales (excluding food, auto, building supplies, and gas station sales) rose by only 0.1 percent in November, according to the Census Bureau, propped up by sales at non-store retailers and furniture and appliance stores. On an annual basis, growth in core retail sales decelerated for the third month in a row, posting the slowest pace since February. From a year ago, retail sales increased 3.3 percent, while core retail sales growth slowed eight-tenths to 3.2 percent.
  • The Small Business Optimism Index published by the National Federation of Independent Business (NFIB) rose 2.3 points in November, the largest increase since May 2018, to tie the highest level since May at 104.7. The net percent of firms planning to increase employment rose by three percentage points to 21 percent, and the net share of businesses reporting higher earnings this quarter rose to 2 percent. A net 30 percent of small businesses in the NFIB survey reported raising compensation and 26 percent plan to do so in the coming months, the highest level in nearly 30 years. The share of firms planning capital expenditures in the next three to six months rose one percentage point to 30 percent.
  • U.S. household and nonprofit organization net worth—the value of assets minus liabilities—rose $574 billion to $113.8 trillion in the third quarter, according to the Federal Reserve. Owners’ equity in real estate rose $3.4 billion to $18.7 trillion, while owners' equity in real estate as a percentage of household real estate value fell approximately two-tenths to 64 percent. This was the second consecutive quarter of decline in the real estate equity ratio, and the first two-quarter decline since the beginning of 2012. Single-family mortgage debt outstanding rose by $89.2 billion to $11.1 trillion. Savings deposits and money market fund shares rose at the fastest annual pace since Q2 2017 and Q2 2008, respectively, though a decline in checking account balances and the value of public equity holdings partially offset these gains.

Ricky Goyette and Rebecca Meeker
Economic and Strategic Research Group
December 13, 2019

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.