Tom Moeller

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At today’s meeting of the Federal Open Market Committee, the target range for the Fed funds rate was left unchanged at 4.25% to 4.50%. This followed reductions at three consecutive meetings in the fall of 2024. Rates remain below the high of 5.25% to 5.50% in place in mid-September. Today’s target range matched expectations in the Action Economics Forecast Survey.

The statement following the meeting indicated that, “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has increased further. The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.”

“The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

The Fed continued, “The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage backed securities.”

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- FOMC holds funds rate target at late-December level.
- Risk assessments include higher unemployment & inflation.

FOMC Targeted Funds Rate Range Is Unchanged; Increased Risks Acknowledged

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The National Activity Index (CFNAI), reported by the Federal Reserve Bank of Chicago, stood at -0.25 during April after 0.03 in March, revised from -0.03, and 0.37 in February, revised from 0.24.

The index's three-month moving average, which smooths out the m/m volatility in the index, held steady in April at 0.05, down from 0.16 in February. This reading compares to a value of zero, which equals trend real GDP growth. Research at the Chicago Fed indicates that an average reading of -0.70 or below is consistent with the economy being in a recession.

The April reading reflected a negative contribution from the Production & Income index which fell to -0.18 from -0.07 in March and +0.29 in February. The Personal Consumption & Housing contribution of -0.04 in April compared to +0.09 in March and -0.01 in February. The Sales, Orders & Inventories index series fell to -0.04 in April from 0.06 in March and 0.13 in February. The Employment, Unemployment & Hours index held steady last month after contributing -0.05 in March and -0.03 in February

The CFNAI Diffusion Index, which measures the breadth of change in the component series and is also a three-month moving average, fell to -0.05 in April from -0.02 in March and +0.17 in February. A reading of zero indicates that all of the indicators are growing at their long-term average. Thirty of the 85 individual data series made negative contributions to the total in April while 55 contributed negatively.

The CFNAI is a weighted average of 85 indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

These figures are available in Haver's **SURVEYS** database.

- Latest reading follows two positive figures.
- Three of four components are negative; one is unchanged.
- Three-month trend is steady

Chicago Fed’s National Activity Index Turns Negative in Apri

Andrew Cates

**Uncertainty and market volatility**
Our first chart this week highlights the dramatic spike in US economic policy uncertainty that followed the announcement of sweeping new U.S. tariffs in early April, a move that re-ignited global trade tensions and sent shockwaves through markets. The surge in the Economic Policy Uncertainty (EPU) Index was accompanied by a sharp rise in the VIX—Wall Street’s so-called “fear gauge”—as investors grappled with the implications of a more protectionist stance and the potential for retaliation. However, in the weeks since, as the administration has partially walked back some of the more aggressive trade measures, markets have responded positively: the VIX has retraced most of its gains, reflecting a rebound in investor sentiment. Yet, the EPU index remains at elevated levels, suggesting that while market volatility has subsided for now, underlying uncertainty around the future direction of trade policy—and its broader economic impact—continues to loom large.

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**Markets and data surprises**
This second chart shows the sharp rebound in global equity markets has unfolded alongside a steady improvement in economic data surprises. After a dip in April, the Dow Jones Global Index (excluding the U.S.) has surged in recent weeks, mirroring a notable uptick in the Citigroup Economic Surprise Index—a measure of how actual economic data compares to expectations. The surprise index, having recovered from negative territory in April, is now firmly positive, suggesting that recent global data releases have consistently exceeded forecasts. 

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**US, European and China data surprises**
This next chart, however, illustrates that these global gains in growth surprises have accompanied a widening divergence in data surprises across the major regions. Since late April, the China growth surprise index has surged, indicating that Chinese economic data have consistently outperformed expectations—likely reflecting supportive policy measures and a rebound in industrial activity. In contrast, the US has remained far more subdued. 

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**US Financial Conditions**
This fourth chart illustrates the Fed’s estimates of how various components of US financial conditions have contributed to growth over the past several months, with the net impact swinging from a notable tailwind in early 2024 to a much smaller one by April 2025. That shift reflects less supportive financial conditions across several components. The US dollar, in particular, has shifted from exerting a loosening influence in early 2024 to acting as a modest headwind in recent months—consistent with its trend toward appreciation. At the same time, equity markets and credit conditions continue to provide mild support, though less than before.  The earlier boost from falling Treasury yields and lower mortgage rates has also started to fade. 

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**Japan’s investor flows**
Japanese investors staged a notable reversal in the week ending May 9th, shifting from sustained net selling of foreign bonds to a sharp uptick in net purchases. This turnaround came just ahead of a rise in US Treasury yields—suggesting that the surge in buying may have preceded heavier selling pressure triggered by Moody’s downgrade of the US credit outlook. Looking specifically at Japan’s holdings of Treasuries, the data show a steady build-up over the first quarter of the year. However, those gains predate the US “Liberation Day” tariffs and the ensuing rise in geopolitical and economic uncertainty. In the wake of these developments, Japanese investors may now face stronger incentives to pare back their US debt exposure. 

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**Energy consumption in Asia**
This final and more structurally-rooted chart illustrates the dramatic divergence in per capita primary energy consumption between China and several other large, fast-growing developing economies—namely India, Indonesia, and Bangladesh—from 1975 to the present. China’s energy consumption per person has surged over the past two decades, particularly after 2000, mirroring the country’s rapid industrialisation, urbanisation, and rise in living standards. As of the most recent data, China's per capita energy use exceeds 30,000 KWh per person, placing it far ahead of its regional peers and underscoring the scale of its development. In contrast, India, Indonesia, and Bangladesh have seen only gradual increases. Although India and Indonesia have more than doubled their per capita consumption since the early 1990s, they remain well below China—each hovering below 11,000 KWh per person. Bangladesh, while growing steadily, remains at a much lower base. The chart highlights a key point: if these populous nations follow anything like China’s energy-intensive path to industrialisation and middle-income status, global energy demand could rise sharply. This poses significant implications for energy markets, climate targets, and infrastructure planning in the years ahead.

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Despite escalating global economic uncertainty—driven in large part by US tariff policies—equity markets have continued to surge, seemingly shrugging off risks that would typically provoke caution. This disconnect has grown more conspicuous in the wake of last week’s downgrade by Moody’s of the US sovereign debt outlook, which underscored mounting concerns over fiscal sustainability. Beneath the surface of the market rally, however, a series of signals suggests a more nuanced and potentially fragile backdrop. A still-elevated US Economic Policy Uncertainty Index, for instance, contrasts with a moderating VIX, hinting at sanguine investors even as policy signals grow noisier (chart 1). Globally, equity markets have been responding positively to a sharp improvement in economic surprise indices (chart 2). Yet, this momentum has been highly uneven: China’s economic surprise index has soared, while the US index remains negative, signalling a big divergence in growth dynamics (chart 3). Meanwhile, US financial conditions for growth have turned modestly supportive after a long stretch of tightening, but this can be traced in part to surging equity markets (chart 4). In the meantime, Japan’s recent increase in purchases of long-term foreign debt, including U.S. Treasuries, suggests a renewed appetite for yield, but the latest data also underscore the fragility of foreign demand for US debt (chart 5). Finally, energy consumption trends offer a longer-term lens: should countries like India, Indonesia, and Bangladesh follow China’s industrialisation trajectory, the implications for global energy demand—and the world economy more generally—could be profound (chart 6). In summary, while risk assets rally, the global macro environment is anything but settled. Underneath the optimism lies a world grappling with heightened protectionism, structural constraints, divergent recoveries, and mounting fiscal and geopolitical strain.

Charts of the Week: Uncertainty Lingers

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Mortgage applications declined 5.1% (+18.1% y/y) in the week ended May 16, after rising 1.1% in the prior week, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications to purchase a home fell 5.2% (+12.7% y/y) after rising 2.3% one week earlier. Applications to refinance a home loan weakened 5.0% (+27.1% y/y) last week after easing 0.4% in the prior week.

The effective interest rate on a 30-year fixed rate loan rose to 7.12% in the week ended May 16 after falling to 7.06% in the prior week. The latest rate was the highest since the second week of February. The effective rate on a 15-year fixed rate loan rose to 6.39% in the week ended May 16 following the prior week’s fall to 6.27%. The rate on a 30-year jumbo loan of 7.15% compared to 7.0% in the prior week, while the rate on a 5-year ARM fell to 6.29% in the week ended May 16 after rising to 6.36% in the prior week.

The share of applications to refinance an existing mortgage edged higher to 36.6% in the week ended May 16 from 36.4% in the prior week. The share of loans with an adjustable rate eased to 7.1% last week after falling to 7.4% one week earlier.

The average size of a mortgage loan declined 2.0% (+1.4% y/y) to $389,400 in the week ended May 16, after slipping 0.7% to $397,300 in the prior week. The average size of a loan to purchase a home eased 0.7% (+0.5% y/y) to $446,200 in the latest week after rising 1.1% to $449,300 in the week prior. The average size of a loan to refinance an outstanding mortgage declined 5.0% (+9.0% y/y) last week to $291,100 after declining 5.8% to $306,500 one week earlier.

The Mortgage Bankers Association Survey covers 75% of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. The base period and value for all indexes is March 16, 1990=100. The figures for weekly mortgage applications and interest rates are available in Haver’s **SURVEYS** database.


- Purchase applications & loan refinancing decline.
- Effective interest rates increase.
- Average loan size falls.


U.S. Mortgage Applications Decline Last Week as Interest Rates Jump

Robert Brusca

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UK inflation is rising. Whereas weakening oil prices seem to be containing inflation everywhere else, particularly in the European Monetary Union, but also to some extent in the United States, we see in the United Kingdom that headline inflation is on an uptrend, core inflation is on an uptrend, too, not quite as discernible as this, but it's nonetheless on its own uptrend.

Headline inflation for the UK CPI-H measure rose by 0.6% in April after 0.2% in March and in February. The CPI-H version of core excluding food, energy, alcohol, and tobacco rose by 0.4% in April after rising 0.3% in March and 0.2% in February.

Sequential inflation rates show the CPI-H up 4% over 12 months, up at 4.7% pace over 6-months and up 3.9% at an annual rate over 3-months. All of these rates are excessive compared to the Bank of England's 2% target. A year ago, the headline was running at 3.1% year-over-year; conditions have worsened since then even in the face of what have been lower and falling global energy prices.

The sequential trend for the CPI-H core measure shows a gain of 4.3% over 12-months, a 4.6% annual rate rise over 6-months and a 4% annual rate gain over 3-months. The only clear pattern we have from these various periods is that in all of them the inflation rate is excessive; and one year-ago the core year-over-year pace was 4.4%. So, conditions appear as though they may have improved marginally since then, but again I would emphasize that I'm only saying that it appears so, and that the improvement is marginal.

Diffusion calculations show the breadth of acceleration period to period and demonstrate that inflation acceleration has become less common than it was a year ago when headline inflation was up 3.1%. The diffusion of inflation was only 9.1% then, that tells us that the overall inflation rate was 3.1% and that prices were not generally accelerating across most categories only in 9% of them. However, this year the diffusion gauge for the headline that has inflation up to 4% is at 54.5% and then the gauge over 6-months with the inflation rate is 4.7% has diffusion also at 54.5%. And both of those horizons’ inflation is accelerating slightly more than it's decelerating since the diffusion measures are above the neutral value of 50. However, over 3-months when the inflation rate settles down a bit to 3.9% the diffusion measure is only 36.4%, indicating that the breadth of inflation has narrowed and that there is now more deflation than there is inflation over 3-months. That comes from comparing the inflation rates when 3-month inflation was 3.9% to 6-months when it was 4.7%. The slightly improved diffusion gauge is therefore not surprising; however, it's also encouraging that it suggests that the slower inflation rate has more breadth to it and isn't just the result of one or two rogue categories that may have tipped the balance.

At the bottom of the table as a reference we have the unemployment rate as well as the UK claimant rate of unemployment and on these measures we you can see that the economy has been weakening slightly  The year ago unemployment rate was 4%, the claimant rate was 4.1% over the last 12-months it moved up to 4.3% with the claimant rate still at 4.1% over 3-months. The unemployment rate is up to 4.4% compared to 4.5%; the claimant rate shows the unemployment rate has been creeping up although there's nothing draconian in train. This is not a happy report for the Bank of England. Inflation is still not under control and while the breadth of inflation may have been cut over three months all of the inflation data suggest that inflation is stubborn and that it has been stubborn and that there's a slightly accelerating trend that is still underway. This is an unfriendly report.


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United Kingdom

UK Inflation Rises