GDP Posts Expected Decline

This week's historic GDP report and key Fed meeting produced results that were right in line with investor expectations and caused little reaction. Mortgage rates dropped slightly to fresh record low levels.

As expected, the Fed held the fed funds rate steady at Wednesday's meeting, and its statement was very similar to the prior one. Chair Powell repeated the message that the Fed will use all its tools to support the economic recovery for as long as necessary. Since March, the Fed has bought over $2.5 trillion of Treasuries and mortgage-backed securities (MBS) to help lower bond yields and boost economic growth. Looking forward, investors will be closely watching for changes in the Fed's level of asset purchases or other monetary stimulus measures.

The reduced economic activity resulting from the pandemic has caused a decline in inflation, which has helped keep mortgage rates low. In June, the core PCE price index was just 0.9% higher than a year ago, which was down from an annual rate of increase of 1.0% last month. Core PCE is the indicator favored by the Fed, and officials have stated that their target level for annual inflation is 2.0%.

In March, the government initiated an enhanced unemployment benefits program through July 31 which increased weekly payments by $600 and expanded the number of people who qualified. With millions of Americans still out of work due to the pandemic, there is widespread support for additional aid. However, lawmakers have been unable to agree on the details of a new program, and it's not yet clear when one will be implemented.

Looking ahead, investors will continue watching for news about medical advances, government stimulus programs, Fed monetary policy changes, and plans for reopening the economy. Beyond that, the monthly Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. In addition, the ISM national manufacturing index will be released on Monday and the ISM national services index on Wednesday.