Fed Optimistic, But Not Quite Ready to Pull the Trigger

Not yet, the Fed said on Wednesday.

Not yet, the Fed said on Wednesday. The time’s almost right for an interest rate increase—so long in coming that it almost has a mythical quality—but not yet. Or as the minutes of the latest meeting (July 28-29) of the Federal Open Market Committee put it: “Although [the committee] had seen further progress, the economic conditions warranting an increase in the target range for the federal funds rate had not yet been met.” The sentiment wasn’t quite unanimous, since one member was ready to hike. But in the end, that member was willing to wait one more meeting.

On the whole, the Fed seems to believe the economy’s almost strong enough for borrowers to pay a little more for their loans. For example: “On balance, labor market indicators suggested that underutilization of labor resources had diminished since early this year.” Also: “Real personal consumption expenditures (PCE) appeared to have risen at a solid pace in the second quarter.” And: “Real spending for nonresidential structures excluding drilling and mining appeared to rise solidly in the second quarter, as firms’ nominal outlays for such structures increased at a robust pace again in May.”

The FOMC minutes had a few things to say about real estate as well. Financing for commercial real estate remained broadly available, the minutes noted. CRE loans on banks’ books expanded in the second quarter, consistent with stronger loan demand reported in the July Senior Loan Officer Opinion Survey on Bank Lending Practices. Also, issuance of commercial mortgage-backed securities continued to be robust, and residential mortgage lending conditions stayed accommodative for many consumers. “However, credit conditions remained tight for riskier borrowers, such as those with low credit scores, undocumented income, or high debt-to-income ratios,” the minutes explained. Interest rates on 30-year fixed-rate mortgages were little changed, in line with MBS yields and other longer-term interest rates.

Also, the FOMC noted, activity in the housing sector improved somewhat in recent months but remained slow. Starts of new single-family houses declined in June but rose for the quarter as a whole, and the level of permit issuance pointed to increases in starts in later months. In the multifamily sector, starts and permits increased sharply in June, likely reflecting in large part a pull-forward of activity due to an expiring tax credit in New York City. Sales of new homes declined in June, but existing home sales increased, and the rate of pending home sales pointed to little change in closed sales over the next couple of months.