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Apr 24, 2019

Real Time Economics I Markets Rally, Housing Thaws, U.S. and China Set Date for Talks

The Wall Street Journal.
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Real Time Economics 

Is This What the Fed Wanted?

The S&P 500 and Nasdaq Composite had their highest closings on record Tuesday, regaining ground lost in last year's rout. Stocks have flourished under a more accommodative Federal Reserve. The central bank said in January it would hold interest rates steady, setting in motion the stock market’s strongest first-quarter run in more than two decades, as investors dialed back up their appetite for riskier assets like stocks. Renewed optimism around the U.S. economy also helped, Michael Wursthorn and Jessica Menton write. Shares appeared set for a pause Wednesday.

The Fed obviously watches markets. But buoyant stocks aren’t part of its mandate. Congress set dual goals of stable prices and maximum sustainable employment. It's not clear how close officials are to achieving either. The central bank's preferred inflation gauge registered at 1.8% in January, just below its 2% target and suggesting the economy is running a little cool. The unemployment rate in March was 3.8%, below the 4.3% the Fed estimates is sustainable and suggesting the economy is running a little hot.

Of course, the Fed isn't the only thing behind the market's recovery. U.S. corporate profits have surged. For the second half of the 20th century, corporate profits after tax typically ran to around 6% of the country's economic output, and almost never rose above 8%. Now, the figure runs to 10%, helped by last year’s tax cuts, Mike Bird writes. Those hefty gains will be hard to repeat, and suggest the latest rally has its limits.
The Fed's next policy meeting is April 30-May 1. Federal-funds futures on Wednesday showed the market pricing in a 95.5% chance the Fed leaves rates unchanged, according to CME Group.

What to Watch Today

U.S. Treasury Secretary Steven Mnuchin participates in a moderated discussion on fintech and the future of banking at 9 a.m. ET.
The Bank of Canada releases its rate announcement and monetary policy report at 10:00 a.m. ET.

Top Stories

Can We Fix It? Yes We Can!

Yesterday, we asked what's wrong with the housing market: U.S. existing-home sales have posted an annual decline for 13 straight months despite low mortgage rates and a strong labor market. Well, here's a possible ray of sunshine: The pace of new-home sales in March rose to the highest level in more than a year. It could be that builders are finally responding to pent-up demand for starter homes by building smaller and less expensive structures—the median sales price of a new home fell to the lowest level in more than two years.

Price Controls

Rising housing costs haven't just hit buyers. Renters, especially in big cities, have gotten squeezed—and some lawmakers are responding with rent control. Most of the dozen or so proposals are in their early stages but some states have already taken action: Oregon passed a law in February, Colorado Democrats introduced a bill to repeal a longstanding ban on rent control, and New York lawmakers are also weighing a cap on rent increases, Will Parker reports.
That's potentially bad news for landlords. What about tenants? A paper out last month from Stanford University's Rebecca Diamond, Tim McQuade and Franklin Qian studied a 1994 rent-control law in San Francisco and found it helped current tenants stay put but also reduced rental housing supplies. "Thus, while rent control prevents displacement of incumbent renters in the short run, the lost rental housing supply likely drove up market rents in the long run, ultimately undermining the goals of the law."

Communication Breakdown

China and the U.S. are locked in a battle to dominate the world’s top technologies. U.S. officials say Beijing at times turns to espionage and cyberhacking to achieve its goals. In other cases, it creatively sidesteps U.S. regulations. The latter appears to be the case in commercial satellites, Brian Spegele and Kate O’Keeffe report.
  • U.S. law effectively prohibits American companies from exporting satellites to China, where domestic technology lags well behind America’s.
  • But the U.S. doesn’t regulate how a satellite’s bandwidth is used once the device is in space. That has allowed China to essentially rent the capacity of U.S.-built satellites it wouldn’t be allowed to buy.
  • That bandwidth has been part of efforts to connect Chinese soldiers on contested outposts in the South China Sea, strengthen police forces against social unrest and make sure state messaging penetrates far and wide.


U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin head to Beijing for trade talks next week, the White House said Tuesday. The talks with Chinese Vice Premier Liu He begin April 30. Mr. Liu is set to lead a delegation to Washington for another round of negotiations starting on May 8. 

The Biggest Loser

There's a lot at stake for the Trump administration's trade agenda in the next few weeks. A new report by the European Central Bank finds the U.S. economy could be hit much harder than either China's or the eurozone's in a fresh escalation of international trade tensions. Under one scenario, U.S. gross domestic product would fall by more than 2% in the first year of a heightened trade war, while the eurozone economy would drop by about 0.1%, and China's economy would gain, Tom Fairless reports.

What Else We're Reading

There will be blood, especially when lottery tickets are involved. A paper from the Center for Economic Policy Research examined 10,000 donors that were offered rewards—lottery tickets or cholesterol tests—when blood supplies were low. The authors found that “offering a lottery ticket increases donations by 5.6 percentage points over a baseline donation rate of 46 percent. In contrast, we find no economically and statistically significant effect of the free cholesterol test.” 
The White House shouldn't just blame the Fed when interest rates rise. It should blame Congress—and itself—for policies that push up federal debt. "Our results suggest that the average long-run effect of debt on interest rates ranges from about 2 to 3 basis points for each increase of 1 percentage point in debt as a percentage of GDP," the Congressional Budget Office said in a working paper.

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