The Federal Reserve Vowed to Keep Interest Rates Near Zero Until Inflation Is On Track to Overshoot the U.S. Central Bank’s 2% Target

By | September 21, 2020

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.


Global markets slid on Friday as investors sought direction after the U.S. Federal Reserve meeting and a jump in coronavirus cases in Europe rattled sentiment. European countries from Denmark to Greece announced new restrictions on Friday to curb surging COVID-19 infections in some of the largest cities, while Britain was reported to be considering a new national lockdown. MSCI’s benchmark for global equity markets fell 0.62% to 566.62. On Wall Street, the S&P lost 37.55 points, or 1.12% to 3,319.46 and the Dow Jones Industrial Average fell 244.56 points, or 0.88% to 27,657.42. The Nasdaq Composite dropped 117 points, or 1.07% to 10,793.28. For the week, the S&P fell 0.65%, the Dow slipped 0.03% and the Nasdaq declined 0.56%. Investors ignored a report that U.S. consumer sentiment increased in early September. A decision by Republican Donald Trump to Bn WeChat and TikTok from U.S. app stores starting Sunday night raised concerns about U.S.-China political tensions.

Data released this week was short of expectations and suggested the economy is downshifting to a slower trend. Industrial production increased just 0.4% in August, about half the 1.0% expected increase by consensus. Utilities dipped slightly but the biggest drag was mining. Despite increased coal and metal ore production, mining fell 2.5% as Hurricane Laura and Tropical Storm Marco caused oil extraction in the Gulf to shut down temporarily. The strength of the recovery in manufacturing is fading. Factory output increased 1.0% in August after a 3.9% advance in July. Manufacturing is reflecting the pandemic economy, with high-tech industry output continuing to rise and ex-high tach output rising less in August and still down from a year ago.

Retail sales also came in short of expectations, rising 0.6% in August. An important factor was this was the first post-pandemic month without the additional $600/week benefit from the federal government for unemployment. August sales were still sufficient to lift retail sales to a fresh record high. However, the pandemic has changed how consumers spending money. With a lot of kids not going to school and parents working from home, sales at electronic stores saw a 0.8% increase in sales in August but sales remain 2% of their pre-crisis peak. People are driving a little again, but gas station sales remain 14.8% below pre-virus levels. Restaurant and bar sales increased 4.7% in August, but sales are still down 16% their pre-crisis peak.

Housing starts and permits were also disappointing in August. Starts fell 5.1% to a 1.426 million annualized units. The August decline was entirely in the multi-family sector, where starts fell 22.7%. Single-family starts increased 4.1%, the fourth consecutive monthly increase. Total permits fell 0.9%, but single-family permits were up 6.0%. This suggests the positive trend in single-family homes will continue for a fifth month.

The Federal Reserve vowed to keep interest rates near zero until inflation is on track to overshoot the U.S. central bank’s 2% target and to help bring millions of out-of-work Americans back to the labor market. The Fed’s new guidance also started a vigorous policy debate as the Fed shifts from a crisis-era focus on keeping markets afloat during the pandemic to manage what it sees now as a steady, multi-year recovery. Underscoring some of the disagreement in the Open Market Committee, the decision drew two dissents, one from a policymaker who thought it went too far and another who thought it didn’t go far enough. Jerome Powell promised that rates will remain highly accommodative until the economy is far along in its recovery. The new economic projections showed policymakers see the economy shrinking 3.7% this year, far less than the 6.5% decline they forecast in June. Unemployment, which, registered 8.4% in August, is projected to drop to 7.6% by the end of the year.

Next week, we get a look at the Chicago Fed national activity index, existing and new home sales and the advance durable goods orders report.

Latest Data

The U.S. Economy:

Industrial production slowed noticeably in August, rising 0.4%, following a 3.5% advance in July and a 6.1% jump in June. Mining fell 2.5% in August and utility output declined 0.4%. Manufacturing did advance 1.0% in August after a 3.9% jump in July. The auto sector declined 3.7% after a spectacular 31.7% jump in July. Manufacturing remains about 7% below its pre-COVIDE-19 peak. Manufacturing excluding the auto sector increased 1.4% in August. Business equipment output advanced 1.9%, a slowdown from the 6.6% jump in July. Industrial activity has slowed after the initial jump following the re-opening of factories. Vehicle sales stalled in August after making some impressive gains. Growth in auto demand will likely grow at slower rates the next few months. The international sector is coming back, but slowly. Growth in manufacturing will be moderate the rest of the year.

The recovery in retail sales has slowed. Sales increased just 0.6% in August, following a 0.9% advance in July and a 8.6% leap in June. Motor vehicles and parts sales increased just 0.2%. Sales excluding the auto sector and gasoline, increased 0.7%. Sales were 2.6% above their year ago level and 1.9% above February’s level. For the first time in several months, no segments posted double-digit growth. Leading growth was restaurant sales, which advanced 4.7%. Apparel, furniture and building supply stores posted growth in the 2-to-3% range. On the downside, sporting goods sales fell 5.7% but were up 11.1% from a year earlier. Non-store retailers’ sales were unchanged for the month. Through July, stimulus efforts replaced income lost by unemployment. That has changed and the rise in infections slowed the re-opening of the economy. Without more stimulus, cash will not be as available. Spending will likely remain positive but follow a slower trend.

The housing market has been red hot but cooled about in August. Housing starts fell 5.1% to a 1.316 million annualized units. The volatile multi-family segment accounted for all the weakness, dropping 22.7% to 395,000 annualized units. Single-family starts increased 4.1% to 1.021 million. This was the fourth consecutive monthly increase for the single-family sector. Housing permits slipped 0.9% to 1.47 million units. Single-family permits rose 6.0% to a 1.036 million rate and the multi-family sector fell 14.2% to 434,000. On a year ago basis, total starts were up 2.8% in August. Housing recovered quickly from this recession as the market was undersupplied and interest rates are at rock bottom. As the economy is slowing and pent-up demand is being spent, construction will slow but low rates will activity at a decent level.

Business inventories grew by only 0.1% in July, following six months of declines. Manufacturing inventories decreased by 0.5% and wholesale stocks fell by 0.3%. Retail inventories increased by 1.2%. Business sales continued to recover. Wholesale sales and manufacturing sales were each up 4.6% and retail sales gained 0.5%. The inventory-to-sales ratio fell from 1.37 to 1.33. The ratio equaled 1.39 in July 2019. The cycle low was 1.25 and the recession high was 1.49. Sales in nearly all the measured categories were above year ago levels. Sales will slow as stimulus efforts are fading and unemployment is still high. Job growth is slowing and it will take time to reach pre-COVID levels.


The latest data from China point to decent amount of momentum. Manufacturing continues to lead the rebound, as industrial production rose 5.6% year-over-year, the largest increase since December. Retail sales increased 0.5% in August, the first gain since 2019. Services output strengthened in August to 4% y/y. Economic growth jumped in the second quarter and data points to a positive third quarter. China’s economy should grow 2.4% in 2020, the only major economy to have posted positive growth for the year. 

Important Data Releases This Week

The August Chicago Fed national economic activity report will be released on Monday, September 21 at 8:30 AM. The index has been moving forward but is slowing down, rising by 1.2 points in July. The index should increase by 0.5 of a percentage point for August.

August existing home sales will be released on Tuesday, September 22 at 10:00 AM. Sales have been strong, rising to a 5.86 million pace for July. We expect an increase to 6.03 million for August.

August new home sales will be released on Thursday, September 24 at 10:00 AM. New home sales have also been robust, rising to 901,000 for July. Low interest rates are helping fuel housing sales. New home sales should cool a bit to 891, 000 for August

August durable goods orders will be released on Friday, September 25 at 8:30 AM. Durable goods orders will continue to advance in August, projected to rise 1.0%, following the strong 11.4% advance in July. Manufacturing is reflecting the pandemic world, with goods producers, such as fabricated metals and wood products seeing advances and service industries such as airlines still weak. A slower trend will follow in coming months.

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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.