Financial Review
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DOW – 41 = 17,071
SPX – 5 = 1977
NAS – 6 = 4505
10 YR YLD – .04 = 2.49%
OIL + .59 = 92.61
GOLD – 4.40 = 1216.00
SILV – .20 = 17.56
Starting with economic data:
Consumer spending accelerated in August. Consumer spending rose 0.5% last month after being unchanged in July. Growth in personal income ticked up 0.3%, in line with forecasts. Some of the strength in spending came from a decrease in the saving rate, which eased back from a 1-1/2-year high in July.
One area where spending dipped – housing. The National Association of Realtors issued its index of pending home sales for August. Pending sales dropped 1% from an 11 month high in July. Signaling that upcoming closings of existing homes are likely to slow down, the index of pending home sales hit a seasonally adjusted 104.7 in August, compared with 105.8 in July.
The Fed’s preferred gauge of inflation was up 1.5% in August from a year earlier, down slightly from the reading in July. Excluding volatile food and energy prices, so-called core prices also advanced 1.5% year over year. Price increases measured by the PCE index slowed to a 1% annual pace late last year before accelerating during the spring and then plateauing this summer. A separate measure also shows inflation is largely in check. The Labor Department’s consumer-price index rose 1.7% in August from a year earlier. That was a marked slowdown from the better-than-2% pace recorded the previous four months.
Weak inflation gives the Fed leeway to maintain its low-interest rate policy without causing the economy to overheat. The Fed aims to set monetary policy so that prices will increase 2% a year. Now, the next logical question might be: why does the Fed target 2% inflation? And the official answer is that the Fed thinks 2% is consistent with its mandate of price stability and maximum employment. Of course, you could make the argument that 4% inflation could be just as stable as 2%, as long as everyone came to expect 4%, and there were no curve balls, we could have price stability at 4% just as easily as 2%. And the notion that the Fed might raise rates if inflation does hit 2%, well that doesn’t seem to be a good idea when it comes to maximum employment; just because inflation hits 2%, that seems a weak reason to tighten credit and slam the brakes on recovery.
So, back to the question: why 2%? Apparently they haven’t figured out a better way to turn the money spigot on and off; perhaps a combination of population growth and productivity growth; expanding the money supply to match the growth of people and things. Instead, they picked a number out of thin air, which is also how they create more money.
