FOMC Minutes Leave Rates Little Changed

Rates little changed following FOMC minutes release

Today, all eyes were on the July FOMC minutes for additional insights into the Fed’s updated inflation outlook and potential taper timeline.  The bond market was generally unimpressed as Treasury yields and swap rates remained little changed after the minutes were released – the 10-year Treasury yield closed flat at 1.26%.  Major US equity indices closed in the red for a second day in a row – the S&P 500 and DJIA fell 1.1%, while the Nasdaq declined 0.9%.

FOMC minutes reveal Fed’s inflation goal has been met

For over a year the Fed has remained steadfast in its decision to wait until “substantial further progress” towards its dual mandate of price stability and maximum sustainable employment had been made before making any changes to its easy money policy.  While officials still believe the labor market has room to grow, the latest Fed minutes showed most participants “noted that, while the specific results depended on the period used in the calculation, some measures of average inflation were already moving above, or would soon move above, the committee’s 2 percent goal.”  Officials noted significant upside risks and forecasted “that larger-than-anticipated supply chain disruptions and increases in input costs could sustain upward pressure on prices into 2022.”  As a result, the majority of participants “judged that it could be appropriate to start reducing the pace of asset purchases this year.”

US housing starts decline more than expected in July

Housing starts fell to an annualized rate of 1.534 million from 1.65 million in June, falling below Bloomberg’s forecasted 1.6 million figure.  While lumber prices have come down over 70% from the record high around $1,700 per thousand feet in May, building costs remain historically high and weighed on homebuilding last month.  Despite rising home prices, permits for future homebuilding rose 2.6% to 1.635 million, supported by robust demand supported by historically low mortgage rates.  The backlog of homes that have yet to be started grew to a record 241,1000 following a consistent month-over-month uptick in permits.