Chicago Fed June Index Nears Historical Trend

At least one indicator of the health of the U.S. economy appears to support the case for a modest federal funds rate hike at next week’s meeting of the central bank’s open market committee (FOMC). The Chicago Fed National Activity Index (CFNAI) for June ticked up from −0.03 in May to −0.02. The April CFNAI reading was a sluggish −0.73.

Last May, Chicago Fed President Charles Evans warned that slowing global growth in advanced economies and low inflation ultimately may limit the ability of central banks to use conventional monetary policy tools to counteract downturns in the future. What that means is that as economic activity settles closer to trend, the need diminishes to juice the economy with a big rate cut.

Just last Thursday, New York Fed President John Williams made comments indicating a larger reduction might be called for. The New York Fed then recalibrated Williams’ statement, much to the dismay of the U.S. president.

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The New York Fed’s walk back and Monday’s CFNAI now have investors betting that the FOMC will cut the funds rate by 0.25 percentage points from its current target range of 2.25% to 2.50%, rather than making a half-point cut in the interest rate.

Of the CFNAI’s 85 indicators, 40 were positive and 45 were negative in June, and 36 improved while the other 49 deteriorated. Although the name may indicate a regional index, the CFNAI is actually a national index that includes more factors and indicators than any other report on general business conditions.

Production-related indicators dipped from 0.08 in May to flat in June and industrial production was unchanged at 0.04. Sales, orders and inventories dropped from 0.02 in May to −0.03 in June.

Employment indicators rose from −0.08 in May to +0.06 in June with nonfarm payrolls rising by 224,000 in June following a rise of 72,000 in May. The personal consumption and housing indicator was unchanged at −0.05.

The May monthly index value was revised to −0.03 from an initial estimate of −0.05, and the April monthly index value was revised to −0.73 from last month’s estimate of -0.48. The June index reading is based on data for 51 of the 85 indicators; the other 34 indicators are based on estimates.
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