At the Kansas City Fed’s annual symposium in Jackson Hole, Fed Chairman Bernanke’s speech seemed to confirm our belief that the FOMC intends to remain neutral through year end.  The focus of his comments was on sluggish growth and fragile financial market conditions. Inflationary pressures were downplayed on the premise that the softening economy and recent commodity price declines will reign in inflation.  Attention was also paid to the need for increased regulatory authority.

Overall PPI prices were much higher than expected, rising 1.2% in July, as food prices rose 0.3% and energy prices increased 3.1%.  Over the last 12 months overall PPI prices have soared 9.8%, the fastest rate of increase in 27 years.  Core finished goods PPI prices were also above expectations, rising 0.7% in July.  The year-over-year core finished goods PPI inflation rate picked up to 3.5% in July.  We may be less sanguine about the prospects for moderating inflationary pressures in the near future than Chairman Bernanke (or atleast his public assessment thereof), however Fed policy is likely shackled by credit problems and the financial sector and will not change.

Fannie Mae and Freddie Mac both plummeted on reports that government intervention is becoming a greater reality, and has the potential to wipe out existing equity holders.  Moody’s cut ratings on both entities’ preferred stock.

Commodity prices firmed somewhat during the week.  Benchmark crude oil prices worked higher through Thursday, only to fall sharply again on Friday to $114.59 per barrel.  In addition to market forces, hurricane season may also cause some price volatility in energy.

Market activity was quite volatile last week. As is usually the case in late summer leading up to Labor Day, trading volume was quite light, so any news created wide price swings.  A similar environment is possible this coming week as well.  This time of year also brings hurricane season.

The coming week brings several economic reports, including FOMC minutes and Case-Shiller home prices on Tuesday, durable goods on Wednesday, the first revision to 2Q GDP comes out Thursday, and personal income/spending is updated on Friday.