September 2019 Q & A

1. Question:

Do I always have to give written notice to our resident before making a repair? They called yesterday and we simply made an appointment for the plumber to meet them at the property next week.


Normally, you would have to give a written 24 hour notice, but if the tenant and the landlord orally agree to an entry to make repairs or supply services for a specific date and time, and the entry is within one week from the date of the agreement, no written notice is required. Also, in cases of emergency or abandonment, the landlord is not required to give written notice.

2. Question:

Can a resident legally drink alcohol in the outdoor common areas of an apartment community?


Landlords have the right to restrict the drinking of alcohol in the common areas of the premises.

3. Question:

My tenant vacated and has damaged the unit more than the security deposit will cover. The tenant had a co-signer on the agreement. I have written the tenant and co-signer with no response after 30 days. Do I file a small claims action against both the tenant and the co-signer or should they be separate lawsuits?


You can file against both of them in the same small claims court suit.

4. Question:

What are the reasons that a tenant can legally break a lease agreement? Is relocation due to a job change a legal reason to break the lease?

Relocation of a job by a tenant is not a legal reason to break a lease, unless the lease allows for this specific event.

5. Question:

This month’s rent check from a tenant had a second name printed below the tenant’s name on the upper left corner of the check. If I cash the check for this month’s rent, am I changing the terms of tenancy?


The mere fact that another person is listed on the check does not change the terms of the tenancy. You should inquire about the other person or find other ways to determine if there is an unauthorized occupant, and if so, either have the extra person apply for residency or serve a 3-day notice to perform covenants or quit.

6. Question:

If I give a 60-day notice (tenants have lived there for over a year) to tenants, can they move before the 60 days are up? If so, do they have to give 30 days’ notice, or can they just move?


They can move out within the 60-day period by serving you with a 30-day notice. If they leave before the 60-days are up without serving a 30-day notice, they still owe rent up to the date the 60-day notice expires or the premises are relet (you have to try to relet the premises).

7. Question:

I am considering selling a duplex I own. Both sides are rented under one year leases. A potential buyer said he would need to move into one side of the unit and could not wait for the lease to expire. If there is a sale, doesn’t that terminate any lease I have with the tenants?

A voluntary sale of leased property does not terminate the rental agreement or lease; the new owner steps into the shoes of the former owner and has the same rights and obligations of the former owner.

8. Question:

One of our single tenants who was renting a small one bedroom unit recently died. There are still three months remaining on his lease. What should I do with the security deposit?

Generally, a tenancy for a specified term does not terminate on the death of either the landlordor the tenant. Once the executor or administrator of the decedent’s estate returns possession, you should account for the use of the deposit and direct the accounting to the administrator or executor.

9. Question:

What is a request for a reasonable accommodation?


A reasonable accommodation is a change or exception to the property’s rules, policies, practices or services that is necessary to afford a person with a disability full and equal use and enjoyment of the rental property.

10. Question:

I understand that if a building contains 16 or more units, there must be a resident manager. I have given some responsibilities to an on-site maintenance person, but I do not call him a resident manager. Does this situation comply with the law?

The California Administrative Code requires that a building containing 16 or more units on a parcel must have a person who lives on site and is responsible for representing the owner of the property. The person does not, however, have to be called a “resident manager.”

11. Question:
How can we enforce the entry rules clause in our lease? One of our residents is refusing to show the rental unit to a prospective purchaser of the building.


California’s Civil Code specifically requires residential tenants to allow the landlord to show the rental unit to prospective purchasers and their agents. Failure to comply could lead to an action for unlawful detainer after service of a 3-Day Notice to Perform or Quit if the resident refused to give reasonable dates and times for the entry.

12. Question:

I have a tenant who is driving everyone in the apartment complex nuts. He plays his stereo and television all day and all night and keeps everyone up. We call the police constantly but they can only do so much. I want to evict him but he signed a one-year lease. None of the notices I have make sense in this situation. What can I do to get this noisy tenant out?


If the tenant is causing major and continual disturbances to the quiet enjoyment of the neighboring property and it is severe enough, the court could allow you to evict the tenant after service of a 3-day notice to vacate. This notice does not allow the tenant to cure anything. Writing warning letters and documenting the disturbances can bolster your case if the tenant does not stay quiet.

This article is for general information purposes only. While KTS provides clients with information on legislative changes, our courtesy notifications are not meant to be exhaustive and do not take the place of legislative services or membership in trade associations. Our legal alerts are provided on selected topics and should not be relied upon as a complete report of all new changes of local, state, and federal laws affecting property owners and managers. Laws may have changed since this article was published. © 2019 Kimball, Tirey and St. John LLP

Divided Fed Likely to Cut Rates in September

More rate cuts from the Federal Reserve are expected later this year and into 2020 as the Fed works to “sustain the expansion” of the economy. Speaking for the first time since the July rate cut, Federal Reserve Chairman Jerome Powell said the U.S. economy is in a “favorable place” but still faces “significant risks.” 

“The three weeks since our July FOMC meeting have been eventful beginning with the announcement of new tariffs on imports from China,” said Powell. 

Consumer spending is still strong according to Powell, but job creation has clearly slowed while inflation continues to get closer to the Fed’s 2% target, albeit sluggishly. “Based on our assessment of the implications of these developments, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective,” Powell said.

The three main reasons given for the easing of rates in July were a slowdown in economic activity, trade policy risks and slowing global growth along with low wage growth and low inflation. Right now, analysts at Goldman Sachs are giving a 75% chance of a 25 basis point rate cut in September. Remember, when the Fed cuts rates it simply makes it less expensive for banks to borrow money from each other. Indirectly it does implicitly lower borrowing costs for businesses and consumers. This includes mortgage rates, which generally follow longer-term Treasury notes, and how the market views the impact of the Fed’s decision on rates. 

There were some participants who had preferred a 50 bp rate cut in July as opposed to the 25bp cut, while others lobbied for no cut in July, saying they felt the economy was in a “good place.” 

In general, most participants saw July’s rate easing as “part of a recalibration of the stance of policy, or mid-cycle adjustment.” The minutes also revealed that most members didn’t want to give the impression that there is a set rate policy given the current risk climate. Right now the members see economic growth as “moderate” with continued muted inflation pressure. The discussion did get into more long-term monetary policy considering the current climate and that will likely be a focal point moving forward.

This morning, another twist was added to the stock market as China made an announcement about adding more tariffs to $75 million worth of U.S. goods. The tariffs will reportedly be implemented in two waves, Sept. 1 and Dec. 15. That’s similar to the tariff implementation schedule set up by President Trump.

The Dow dropped a little more than 100 points at the open of the day in response, then dropped 400 points after a series of tweets from President Trump. Trump tweeted that the United States should start to find “an alternative to China.” The 400 point drop was about a 1.5% skid for the Dow while the S&P and NASDAQ slid 1.5% and 1.7%, respectively.

Buyer Traffic is Picking Up

Housing Starts, which gives us a reading on new construction, were down 4% in the month of July, which was worse than expectations. However, the decline was all in multi-family starts. Single-family starts were actually up 1.3% and are up 2% year over year, which is really what's most important for the housing market. Permits, which are a good forward looking indicator, showed some real strength. They were up 7.2% from June, with single-family permits up 4.3%.

Labor Market and Real Estate

The piece that doesn’t seem to fit in the current economic situation is the strong labor market. Just last week the Bureau of Labor Statistics showed a strong market with historically low unemployment being the norm and wages rising. Unemployment has been sitting at or below 4% since fall of 2018. The most recent jobs report showed a rate of 3.7%. That has boosted consumer confidence, but many economists see that as being a sign that the economy has hit peak maturation and is likely to experience a recession.

This chart below, put together by Real Investment Advice and Forbes, shows the U.S. unemployment rate (blue line) and subsequent recessions (gray bars). You can see the pattern clearly.

While these are all indicators of a recession, they do not mean that it is a certainty. If the Credit Suisse estimate of a 22 month period between yield curve inversion and recession holds true, that still allows for the potential impact of an election season in 2020 that could change the trajectory.

Recession or Not: Making Sense of the Mixed Signals

This week the stock market volatility continued as major signals of an upcoming recession shook investor’s confidence, pushing the Dow Jones index to its worst day of 2019. The 10-year Treasury note hit a three-year low of 1.475% on Thursday. Earlier in the week, the 10-year yield dropped below the 2-year yield reflecting an inversion not seen in quite some time. That is a major indicator of an upcoming recession. The yield on the 30-year Treasury note also hit an all-time low of 1.9689%, the first time it has ever dipped below 2%. 

When the 10-year Treasury note yield drops below the yield for the 2-year Treasury note, that is called a yield curve inversion. This occurred earlier this year on shorter-term maturities.The last time the 10- and 2-year Treasuries inverted was Dec. 2005, just before the financial crisis and the Great Recession. On average, once the 10- and 2-year yield curve inversion happens, a recession follows 22 months later, according to data from Credit Suisse. 

The inversion caused a domino effect to ripple through the stock market as the Dow dropped 800 points on Wednesday as investors feared an oncoming recession. The volatility was also spurred by global political concerns in Hong Kong and China along with global economies continuing to falter.

The silver lining in the economy right now is the confidence of American consumers. The Dow made some gains Thursday as Walmart’s earnings gave investors confidence about American consumers’ purchasing power. According to the Commerce Department, retail sales went up 0.7% in July as consumers spent more at restaurants and retail stores. Based on the data from the Commerce Department, some analysts have raised their gross domestic product forecasts for the third quarter by 0.2%. 

Head of global markets at Citizens Bank, Tony Bedikian, told CNBC, “The U.S. is pretty strong actually. The markets are trading more off the headline risk, particularly around tariffs, than the actual fundamentals, at least from the U.S. data. The jury is still out whether the market is going to be correct here, and whether we are going to see a slowdown. We’re not seeing that in the data. Broadly, we’ve seen some slower growth, but it’s still growth. It’s waning a bit but it’s still kind of a Goldilocks scenario.”

MUFG’s chief financial economist Chris Rupkey said the current bond market is a direct reflection of the trade issue with China. “If you look at retail sales, one of the signs of a recession is three consecutive monthly declines in retail sales, and we’re seeing just the opposite.”

The trade war with China did take a turn this week, as the U.S. announced a delay on tariffs for some items on the list of Chinese goods to be taxed. Some items were removed from the lists outright. 

Citing health, safety and national security concerns, items like cellphones, laptops, videogame consoles and clothing items like footwear, have all been put on a delayed tariff schedule until Dec. 15. They were originally going to be taxed starting Sept. 1. The U.S. Trade Representative office did not specify which items would be removed from the tariff list. The decision to delay those items, according to President Trump, was to help alleviate any stress during the holiday shopping season. 

At the beginning of the week, protests in Hong Kong were partly to blame for the steep drop in equities. The main airport was shut down as protestors rallied against a recent law that was proposed and subsequently shelved. The law would have allowed extradition to mainland China for people suspected of certain crimes. Hong Kong is technically under the control of China in a “one country, two systems” agreement for the next few decades. That was part of a deal struck in the mid-1980s when Great Britain gave up control of Hong Kong as a colony. Now, protestors are pushing for a democratic government and causing an upheaval in the small country. 

Meanwhile, a massive stock selloff in Argentina after the country’s primary elections added a wrinkle to global economy issues. The surprise election outcome caused the country’s market to drop 48% in dollar terms. According to Bloomberg, that was the “second-biggest one-day rout on any of the 94 stock exchanges tracked by Bloomberg going back to 1950. Sri Lanka’s bourse tumbled more than 60% in June 1989 as the nation was engulfed in a civil war.”

Elsewhere in the world, a Danish bank has just implemented the world’s first negative rate mortgage. Loans to homeowners can now have a charge of minus 0.5% a year. That means that the bank is paying the borrower to take money and the borrower ends up paying back less than they’ve been loaned. Basically, the monthly payments are reduced each month. This is another sign of a weakening global economy.

August 2019 Q & A

1. Question: What is the code section pertaining to the tenant’s obligation to pay rent subsequent to a thirty- day notice?

Answer: California Civil Code 1946 requires the tenant to serve a thirty-day notice or a landlord to serve either a thirty-day or a sixty-day notice to terminate the tenancy. The rent is owed until the lease terminates.

2. Question: Several prospective tenants have inquired about renting an apartment for a month or two. The high turnovers could be detrimental to the units and will create a lot of work for us in terms of doing paperwork and cleaning. Are there any rules that require a tenant to rent a minimum amount of time?

Answer: There are no laws requiring you to rent month-to-month or a minimum or maximum amount of time. Many landlords require six-month or one-year leases.

3. Question: A tenant reported a broken refrigerator at Monday, 10 a.m.. We replaced the refrigerator on Wednesday, at 6 p.m., in the same week. Now, the tenants want us to pay for the spoiled food. Should we?

Answer: You would only be liable if the tenant could prove you were negligent in maintaining, purchasing or repairing the refrigerator. Landlords are not guarantors or insurers of the tenant’s personalproperty.

4. Question: One of our clients owns an apartment building that we manage. He wants to rent some storage rooms on the property. If he does rent the rooms, would the unlawful detainer process have to be followed if the renter did not pay the rent? Or, do these units have the same rules as storage companies?

Answer: Yes, he would need to follow the unlawful detainer process unless the unit is in a “self-service storage facility” as (as defined in California Business & Professions Code 21701(a)).

5. Question: One of our tenant's dogs is constantly barking and growling at anyone who passes by their apartment. It has scared many of the other residents and they have complained numerous times. I have explained that the lease allows pets. What can I do?

Answer: If the dog is disturbing other residents and is not being properly restrained, it may be a violation of your lease if it contains a clause requiring tenants to refrain from unreasonable annoyances or disturbances. If this is the case, you could enforce the lease through a notice to perform or quit. It is also useful to have pet rules that spell out acceptable and unacceptable behaviors.

6. Question: I am evicting a tenant and gave her a thirty-day day notice. When I handed her the notice she didn't read it, she just dropped it on the ground, so I read it to her. I then gave it back to her but she wouldn't take it, so I dropped it on the ground. Is this considered a legal notice?

Answer: So long as she was notified that you were giving her a legal notice and you didn't take it back, most judges would consider this adequate personal service. If she doesn't vacate in thirty days, an unlawful detainer (eviction) action may be filed in court.

7. Question: We have an undesirable tenant in our apartment community. He is also consistently late paying rent. We have a month-to-month agreement and I want to serve him a thirty-day notice. The next time he pays late, I want to serve him a three-day notice to pay or quit as well. Can I serve both notices at the same time?

Answer: A thirty-day notice and a three-day notice to pay or quit can be served at the same time. If the tenant fails to pay rent within the three-day period, you may immediately commence eviction procedures.

8. Question: I have been a resident manager for over four years and would like to know what a manager can do other than evict when a tenant continues to cause disturbances, e. g. loud music, singing, throwing cigarettes over the patio, etc...

Answer: The threat of eviction sometimes is enough to convince a tenant to respect the quiet enjoyment of the neighboring property. Calling the police for extraordinary disturbances may also serve to quiet down an unruly tenant. If all else fails, you may consider eviction before other residents decide to move.

9. Question: I agreed to allow a resident to move in even though he could not pay the full security deposit. He was supposed to pay one third of the deposit each month. He made the first two payments but has now failed to make the third and final installment. What type of notice should I use?

Answer: The law provides that in the event of a breach of the lease other than non-payment of rent, a three-day notice to perform conditions and/or covenants or quit be utilized. Like a three-day notice to pay rent or quit, this notice only allows the resident three days to comply or be subject to unlawful detainer litigation.

10. Question: I have a tenant who never pays his rent until he receives a three-day notice. We normally serve notices on the eighth of the month even though the rent is due on the first. He is on a one-year lease and I don't know my legal rights.

Answer: You can try serving him with a three-day notice to pay rent or quit earlier than the eighth of the month. If he fails to make payment within the three-day period you have the right to refuse the rent and commence eviction proceedings.

11. Question: One of our tenants has a guest who has been verbally abusive to me whenever I ask him who he is visiting. We have a large apartment community with many amenities and we need to be careful that complete strangers are not using our facilities. What can I do?

Answer: A tenant is responsible for the conduct of his guests. Rude conduct and behavior for enforcing reasonable rules may lead to your decision to not renew the tenant's lease when it expires. If it continues or escalates to a major disturbance, an eviction can be filed.

12. Question: I have a tenant who always "races" his car in the parking area. We have families with small children and a posted five mile per hour speed limit. What can I do to make him stop?

Answer: Creating safety hazards on the premises in a continuous manner may be good grounds for eviction based upon the nuisance activity. If the reckless manner in which he operates his vehicle continues after warnings, a three-day notice to perform covenant or quit may be served.

13. Question: I have a tenant who left her window open when it rained causing water damage to the floor. She said she did not have to pay for the damage because we have insurance for this type of thing and we did not lose anything. What should I tell her?

Answer: Your insurance has nothing to do with a tenant’s responsibility for negligence. If your insurance paid for the damage, they would have the right to be reimbursed by the tenant who caused the water damage. You would also be able to recover the deductible you paid. If the tenant has renter's insurance, he/she may be covered for this type of loss.

14. Question: We had to evict a real trouble-maker recently, but he keeps coming back to the property to use the swimming pool and spa. He is not anyone's guest and some of the residents are frightened of him. What should I do?

Answer: Calling the police for a criminal trespass and disturbance of the peace is the first recommended action.

15. Question: I have a suspicion that one of our tenants falsified his application by giving me a different name and social security number than his own. If I can prove this, what are my rights? I have a six- month lease and he just moved in.

Answer: If you could prove the falsification and you would not have rented to him had you known the true set of facts, the lease would be deemed based upon fraud and set aside. You could bring an unlawful detainer (eviction) lawsuit to regain possession of the premises.

16. Question: My evicted tenant left the property voluntarily three days before the sheriff was scheduled to do the lock-out. Is it wise to keep the appointment or should I just cancel?

Answer: In some cases, it only appears that the tenant has vacated voluntarily. A wrong guess could lead to problems. Many property managers elect to meet the sheriff for the official lock-out. Some property managers decide on a case-by-case basis whether or not to take possession prior to the sheriff's arrival.

This article is for general information purposes only. This courtesy blog/post is not meant to be exhaustive and does not take the place of legislative services or membership in trade associations. These legal alerts are provided on selected topics and should not be relied upon as a complete report of all new changes of local, state, and federal laws affecting property owners and managers. Laws may have changed since this article was published. Before acting, be sure to consult your property manager or an attorney.

© 2019 Kimball, Tirey and St. John LLP

Housing Affordability Within Reach!

With the news of the Feds cutting the rates last week and seeing an increase in incomes, it’s never been a better time to buy. Housing affordability is a real concept and it’s going to be a hot topic. According to an article by Forbes, data from a property data firm, Black Knight, has indicated that with the rates declining, this has increased the American home buying power by 15% since last fall. Thus helping homebuyers purchase a home that is $45,000 more, for the same mortgage payment.

Ben Garboske, President of data and analytics at Black Knight, shares that “the rate of annual home price growth has declined for 15 consecutive months. More recently, declining 30-year fixed interest rates have helped to ease some of those pressures, improving the affordability outlook considerably." Mark Fleming, Chief Economist at First American, weighed in on the matter as well, stating “record income levels combined with mortgage rates near historic lows mean consumer house-buying power is more than 150% greater today than it was in January 2000." Now is the time, more than ever, for your clients to strongly consider re-entering the housing market and take their next step towards home ownership.

Your home buying power is stronger than ever. Don’t miss this opportunity, and together I can help you become homeowners. Let’s explore the possibilities!


As temperatures soar here in the Sacramento region, so do ant invasions. The heat could likely be the cause as it’s actually drying up a lot many water resources, so they're going elsewhere for water and the perfect place is the inside of houses.

To take matters in one’s own hands, there are many household organic solutions, but a tenant should also focus on keeping counters clean and sealing up cracks where ants may get in – near a spicket is a good place to start. Windex is a common household cleaner that helps to cover the pheromone trails ants leave behind.

When the nest sends scouts out, mainly what they're doing is looking for something the colony needs – protein source, water source, whatever. When they find it, they make a pheromone trail and that trail gives the nest the idea what to seek out. Eliminating that trails can be key.

While many tenants may seek out professional pest control, adding chemicals to the inside of a house can be a health hazard to both humans and pets, so more organic solutions are typically offered if the owner does not offer ongoing pest control.

A few solutions that have worked for me and other tenants in the past besides the Windex is Eco Defense Home Pest Control (bio-based product) or Terro ant control bait stations … both are available on line and in local hardware stores.


July 2019 Q & A

1. Question:

A tenant gave a 30-day notice of move out on the 10th of the month and turned in his keys to the owner 5 days later on the 15th. Is he still liable for the balance of the rent owed?
Yes, the tenant still owes for the 30-day notice period, unless the landlord is able to relet the premises before then. The landlord has to make a diligent effort to relet.

2. Question:

We have served our tenant a 60-day notice of termination of tenancy; however they have quit paying the rent. Now we are preparing to send a 3-day notice to pay rent or quit. What is the next step if they do not pay?

If the tenant does not comply with the 3-day notice by paying the rent, you can commence eviction procedures. If the rent owed is paid, the 60-day notice is still valid unless you asked for rent that goes beyond the 60-day notice period.

3. Question:

Our tenants were supposed to move out in two weeks. However, the house they were moving into is not completed and they need to stay for another fifteen days. I have no problem with this, but my question to you is what if they do not vacate on time?

You should have them sign an extension of their lease so if they fail to vacate you can immediately proceed with an action for unlawful detainer.

4. Question:

When you return a security deposit disposition to the vacating tenant, what is the statute of limitations if they do not agree with the deductions and wish to sue in small claims court?

If your rental or lease agreement was in writing, the statute of limitations is four years. If the agreement was verbal, it is two years. The time starts to run from the date of the alleged breach.

5. Question:

My renter was backing downstairs carrying a 38-pound bag of clothes and fell and broke her wrist. Can I be sued and a judgment obtained against me?
You would only be liable if you were negligent in the way you maintained the stairs and your negligence was a proximate cause of the injury. You should notify your insurance carrier as soon as possible.

6. Question:

Our window was broken by a golf ball hit by the tenant of a neighboring property. They admitted they owed me for a new window but moved away before I could collect on it. Is the owner of the property responsible because it was their tenant?


The owner of rental property is not normally responsible for the unforeseeable acts of their tenant. In order for the owner to be liable, you would have to prove that the owner knew or should have known his tenant would have caused physical damage to your property, and the owner failed to take reasonable steps to protect your property from harm.

7. Question:

One of our residents admitted to breaking a window in his unit. Our management company wants to make the repair and deduct it from his security deposit. Please give us your opinion if our management company is using proper procedures.

A resident is liable for damage to the unit caused by any resident or their guests and invitees. The owner/manager, however, can make the repairs and require the resident to reimburse them for the costs of repair. The owner/manager can either deduct the amount from the resident's security deposit or serve the resident with a 3-day notice to pay for the repair. If the resident fails to do so within 3 days, the eviction process may begin.

8. Question:

I have a resident who was just put in a detoxification clinic. Her sister wants me to allow her inside to remove all of her personal possessions and move her out because she says the resident is not planning on returning. What can I do to protect myself from being sued by the resident because someone took her belongings and management re-rented the unit?


Under California law, you do not have the legal right to allow the sister inside to collect your resident's personal items without the consent of the resident. Therefore, any family member who wants inside should provide written authorization from the resident or power of attorney allowing them to enter the unit. Make sure the signatures match or require a notarized statement and check identification. Likewise, if the resident is intending to vacate the unit that should also clearly be stated in writing by the resident.

9. Question:

I am an on-site manager and I am upset because I was tape-recorded without my knowledge or permission by someone who was "shopping" the apartment community. Is this legal?

The law protects individuals from being secretly tape-recorded during conversations in a situation where there is a reasonable expectation of privacy. There are civil, as well as criminal, penalties for violation of the rights of privacy through secret tape recordings. However, there is no violation in cases where the expectation of privacy does not exist, such as telephone answering devices.

10. Question:

My understanding is that unlawful detainer actions remove the tenant from a specific rental unit. My contention is that the tenant is also not allowed anywhere on the premises of the common areas of the premises after an eviction. Frequently the evicted tenant hangs around the premises and causes additional problems out of spite. What can be done and what are my legal rights as owner?


If an evicted tenant returns to the common area of the rental property without invitation by any of the current residents, or without your permission or consent, he or she is trespassing. The common area of the apartment community is under the direct control of the owner and manager, and anyone present without authority or consent is guilty of trespass.

This article is for general information purposes only. This courtesy notification is not meant to be exhaustive and do not take the place of legislative services or membership in trade associations. These legal alerts are provided on selected topics and should not be relied upon as a complete report of all new changes of local, state, and federal laws affecting property owners and managers. Laws may have changed since this article was published. Before acting, be sure to seek reliable legal advice.

© 2019 Kimball, Tirey and St. John LLP

Rates Steady At Near Three-Year Low

With a cut in interest rates a near certainty this month, the Dow Jones Industrial Average skyrocketed to 27,000 for the first time ever. The Dow rallied this week on the testimony of Federal Reserve Chairman Jerome Powell. Powell’s statements prompted a surge for the S&P 500 which hit a high of 3,000 this week. The S&P 500 hit the 2,000 level mark five years ago. 

The minutes from June’s Federal Open Market Committee meeting showed that, “Participants generally agreed that downside risks to the outlook for economic activity had risen materially since their May meeting, particularly those associated with ongoing trade negotiations and slowing economic growth abroad.”

That sentiment was not swayed by a strong jobs report released last week. In his testimony on Capitol Hill this week, Fed Chair Jerome Powell supported Wall Street’s view for the future. They expressed the desire to “act as appropriate” to sustain economic expansion.

“Since the June meeting and, even for a period before that, the data have continued to disappoint,” said Powell. Although the jobs report was the strongest since January, Powell argued that the rest of the data regarding the U.S. and world economies continues to be unimpressive. Of particular concern is the ongoing tariff conflict with China. 

 “Let’s go to trade: We have agreed to begin discussions again with China and while that’s a constructive step that doesn’t remove the uncertainty that we see as overall weighing on the outlook,” Powell said. “The bottom line for me is that the uncertainties around global growth and trade continue to weigh on the outlook. And, in addition, inflation continues to be muted.”

Powell also told the Senate Banking Committee that the classic economic relationship between unemployment and inflation has collapsed. Typically, the trend has shown that when unemployment is low, like we are seeing now, inflation is high. That has not been the case at all in 2019. The Fed has now lowered its inflation target for 2019 from 1.8% growth to 1.5%. 

“At the end of the day, there has to be a connection because low employment will drive wages up and ultimately higher wages will drive inflation, but we haven’t reached that point,” said Powell. “In many cases, that connection between the two is quote small these days.”

The Consumer Price Index data from the Bureau of Labor Statistics did show a strong increase in prices for consumers. The core CPI, which excludes food and energy, rose by 0.3% last month. That’s the largest increase for the core CPI since January of 2018. However, the overall CPI, offset by lower gasoline and food prices, rose by just 0.1%. It’s not expected that this data will affect the Fed’s decision on whether to ease rates.The Producer Price Index (PPI) also saw a modest gain of 0.1% last month. The more telling year-over-year data shows that the PPI rose by just 1.7%. That’s the smallest gain since January of 2017. The underlying producer prices slowed down in June; yet another piece of data the Fed has been following to track our economy’s moderate inflation. Wholesale energy prices saw a big drop in June, slipping 3.1%. Goods prices decreased by 0.4% while a 5.0% drop in gas prices was the biggest contributor to the overall decrease in cost of goods in June.