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No Fed Rate Hike Likely Yet As It Monitors Global Pressures

The Free Press WV

WASHINGTON, D.C. — Not long ago, it seemed a sure bet: The Federal Reserve would raise interest rates by year’s end. Fed Chair Janet Yellen herself said she expected it.

Now, doubts are rising that the Fed will start raising rates before next year from the record lows where they’ve stood since 2008. When its policymakers meet this week, the likelihood of a rate hike is widely seen as close to zero.

What’s changed?

Mainly, a global economic slowdown, led by China, that’s inflicted wide-ranging consequences: U.S. job growth has flagged. Wages and inflation are subpar. Consumer spending is sluggish. Home sales have flattened. Investors are nervous. And manufacturing is being hurt by a stronger dollar, which has made U.S. goods pricier overseas.

“The data has gotten weaker, and the Fed is farther away from achieving its target on inflation,“ said Diane Swonk, chief economist at Mesirow Financial in Chicago. “The greatest risk at the moment is the slowdown in China and other emerging markets and what impact that will have on the U.S. economy.“

Though analysts say a rate hike at the central bank’s next meeting in December is still possible, two key Fed officials have called even that prospect into question.

For months, policymakers had sounded generally confident that the economy was improving consistently, despite a global economic slowdown, and soon would no longer need the support of ultra-low rates. The Fed had cut its benchmark rate to near zero during the Great Recession to encourage borrowing and spending. Hiring had since risen sharply, consumers were spending and the housing market was steadily recovering.

When 2015 began, midyear seemed a likely time for the first rate hike in nearly a decade. But after a harsh winter slowed growth, the consensus view shifted to September.

Then in August, China announced a surprise devaluation of its currency that rocked markets and escalated fears that the world’s second-largest economy was weaker than thought and could derail growth in the United States. Uncertainty was too high, Fed officials decided, for a rate hike in September.

Since then, the outlook has dimmed further with a hiring slowdown, tepid retail sales and factory output and a pause in the housing recovery.

Inflation might be the biggest obstacle. The Fed has essentially achieved one of its mandates — to maximize employment — as the unemployment rate has reached a seven-year low of 5.1 percent. But it’s much further from its other mandate — to stabilize prices. Its inflation target is 2 percent; anything less could signal economic weakness. Yet a price gauge the Fed tracks has stayed below 2 percent for three years and has recently slowed further, reflecting cheaper energy and a stronger dollar, which depresses import prices.

The Fed has said it will start raising rates once it’s “reasonably confident” inflation will return to 2 percent within two to three years. Yellen has said that confidence should be boosted by a stronger job market, which will help raise workers’ pay.

But this month, two Fed board members — Lael Brainard and Daniel Tarullo — questioned the link between falling unemployment and higher inflation. Both expressed doubts about whether the timing would be right for a rate hike this year.

In addition, this week’s Fed’s meeting occurs just as other major central banks — from Europe to China and Japan — are pursuing their own low-rate policies. Against that backdrop, a Fed rate hike would boost the dollar’s value and thereby squeeze U.S. exporters of farm products and factory goods by making them costlier overseas.

Those concerns, of course, must be balanced against other officials who favor rate increases. Jeffrey Lacker, president of the Fed’s regional bank in Richmond, dissented at last month’s meeting because the Fed chose not to raise rates. And in speeches, other officials have expressed a desire to begin raising rates soon.

Investors put the likelihood of a December rate hike at only about one in three. But Mark Zandi, chief economist at Moody’s Analytics, said he expects the Fed to raise rates then as the global economy benefits from new stimulative actions by central banks in China and Europe.

Congress may also help, if lawmakers avert a threatened government shutdown and raise the government’s borrowing limit, two threats that concern Fed policymakers.

Even if the Fed makes no policy changes Wednesday, there’s still likely to be spirited debate at the meeting as Yellen seeks consensus on the timing of a rate hike — a debate not without risks.

“The on-and-off debate about when to raise interest rates has been adding to market uncertainties,“ said Sung Won Sohn, an economics professor at California State University, Channel Islands.

Average U.S. Rate on 30-Year Mortgage Falls to 3.79%

The Free Press WV

WASHINGTON, D.C. — Average long-term U.S. mortgage rates fell this week, marking a 13th straight week below 4 percent and offering an enticement for potential homebuyers.

Mortgage giant Freddie Mac said Thursday the average rate on a 30-year fixed-rate mortgage declined to 3.79 percent from 3.82 percent a week earlier. The rate on 15-year fixed-rate mortgages eased to 2.98 percent from 3.03 percent.

The rates are well below last year’s levels. A year ago, the average 30-year mortgage rate was 3.82 percent, while the rate for 15-year loans was 3.08 percent.

The low rates and steady job gains have helped the real estate market reach what appears to be a stable plateau in recent months. Data issued Thursday by the National Association of Realtors showed that Americans snapped up more homes in September, suggesting that the housing sector remains insulated from global economic turmoil. Still, first-time buyers remain scarce and relatively few properties are being listed for sale, capping the potential growth of the sector.

Sales of existing homes jumped 4.7 percent last month to a seasonally adjusted annual rate of 5.55 million.

To calculate average mortgage rates, Freddie Mac surveys lenders across the country at the beginning of each week. The average doesn’t include extra fees, known as points, which most borrowers must pay to get the lowest rates. One point equals 1 percent of the loan amount.

The average fee for a 30-year mortgage held steady from last week at 0.6 point. The fee for a 15-year loan declined to 0.5 point from 0.6 point.

The average rate on five-year adjustable-rate mortgages rose to 2.89 percent from 2.88 percent; the fee was unchanged at 0.4 point. The average rate on one-year ARMs jumped to 2.62 percent from 2.54 percent; the fee was steady at 0.2 point.

Walmart CEO Got It Wrong

The Free Press WV

While economists and market watchers have often looked to the US’s largest private employer, Walmart, for clues about the health of the economy, the reality is that the pulse can now be found in an online retailer that has no physical stores: Amazon.

And guess what? Things are going well.

Amazon is at an all-time high. After reporting an unexpected profit on Thursday night, the stock was trading near $600 Friday morning.

This a marked contrast with Walmart.

Earlier this month, Walmart CEO Doug McMillon gave a sort of downbeat assessment of the US economy in an interview on CNBC, saying the economy is “steady” and “OK.“

Not exactly a ringing endorsement.

During the financial crisis and in the years that followed, Walmart, which offers a wide variety of products usually at or near the lowest-available price point, was seen as a bellwether for the economy and in particular consumer spending, responsible for about two-thirds of GDP.

And so it has become a habit to hear economic assessments from Walmart executives and take them as indicative of the “state of the consumer.“ But now the place to find the US consumer is Amazon. And in particular, the places where Amazon finds its customers: the front door.

A Wall Street Journal report on Wednesday detailed how landlords in apartment buildings across the US dealing with an influx of packages from online deliveries. This deluge is hurting productivity while creating chaos for building managers and tenants.

Earlier this month we noted that at least one college mailroom at the University of Connecticut was being overwhelmed by an influx of deliveries, and the Chronicle of Higher Education followed with a wider-ranging report on how mailrooms across the country are dealing with this problem.

Amazon Prime, which is available to college students for six months free and $49 a year after that, provides free two-day shipping on almost every product offered by the retailer. And so you could be buying books for class or a new T-shirt or toothpaste or toilet paper and get it sent to your dorm (or mailroom, or lobby, or front door) in two days, free.

As a result, guess where you don’t have to go? Walmart!

Perhaps, however, the most ironic part of McMillon’s seemingly downbeat look at the US economy is that he was speaking with CNBC after the company announced its profits would fall over the next couple of years as it ramps up investment on its employees.

And while this is bad news for Walmart, it is unequivocally good news for the economy.

Again, Walmart employs 2.1 million people and is the largest private employer in the world. If the company is paying its employees more, then you’re going to have more people with greater purchasing power. Again, a major positive for the economy.

On Thursday, Amazon reported revenue of $25.4 billion with product sales — sales of actual stuff — coming in at $18.5 billion, up from $16 billion a year ago.

In the holiday quarter, Amazon expects sales to rise 14%-25% over the prior year.

Next year, Walmart expects sales to be flat.

Techs Lead Wall Street Higher; S&P 500 Erases 2015 Loss

The Free Press WV

A tech share rally drove U.S. stocks up sharply for a second day on Friday as earnings from companies including Microsoft beat analysts’ expectations, while healthcare shares rebounded from recent losses.

The gains left the S&P 500 in positive territory for the year and above its 200-day moving average for the first time since August 19.

An unexpected rate cut in China added to the positive tone for U.S. stocks, which also registered gains for the week.

Microsoft shares (MSFT.O) rose 10.1 percent to $52.87, their highest in 15 years, after adjusted revenue beat expectations for the ninth quarter in a row.

Microsoft gave the biggest boost to the three indexes, accounting for nearly a fifth of the Dow’s gain and leading a strong rally in technology stocks. The S&P technology sector .SPLRCT jumped 3.0 percent, leading gains among major sectors.

Alphabet (GOOGL.O), Google’s new holding company, and Amazon (AMZN.O) soared to record intraday highs after results beat expectations. Alphabet ended up 5.6 percent at $719.33, while Amazon rose 6.2 percent to $599.03.

Facebook Inc. (FB.O) and Twitter (TWTR.N) also jumped, with Facebook rising above $100 for the first time.

The Dow Jones industrial average .DJI rose 157.54 points, or 0.9 percent, to 17,646.7, the S&P 500 .SPX gained 22.64 points, or 1.1 percent, to 2,075.15 and the Nasdaq Composite .IXIC added 111.81 points, or 2.27 percent, to 5,031.86.

For the week, the Dow rose 2.5 percent, the S&P 500 gained 2.1 percent and the Nasdaq jumped 3 percent.

The S&P 500 is now up 0.8 percent for the year so far and up 7.1 percent for October.

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