Rates nosedived last week – anybody know why?
Because no fewer than 9 of the FOMC Federal Reserve Presidents spoke about the Economy, the Federal Reserve Balance Sheet and QE2… and they all contradicted themselves.
One of the commentaries I read suggested that as Investors, and money worriers (not consumers anymore are we?) we are all carefully playing a game of Musical Chairs… waiting to see when the music stops, and only concentrating on what’s happening in our little circle.
But the Stock Markets, the G4, the Gold Markets and yes, even the Housing Markets are all connected Globally. “World markets are highly correlated. World problems in the post-Lehman era are a reflection of this integration. World real estate bubbles are becoming ubiquitous. So why the local-centric view remains dominant is a puzzle.”
As we look BEYOND our collective Fed “Braincells” to see if the music is about to stop… you could say that the Bank of England, the Federal Reserve, the Bank of Japan, and the European Central Bank are now engaged in a sort of global dance with each other.
“Moreover, all fear what may happen if the music stops too soon. That fear drives the encore of QE in the US and Japan.”
Wasn’t QE2 An Ocean liner?
I actually looked it up, because I thought it had a tragic “tale” like the Titanic or something (I was pleasantly surprised that no bad mojo is associated with the phrase) because as I read the Economic notes I keep seeing QE2.
The Federal Reserve seems to be in a debate about whether we need another round of Quantitative Easing (thus QE part 2), or if the risks are too great. On the plus side of easing, the economy is growing slower than anyone would like and it appears that the Fed now views a “too hot inflation rate” at 2% (up from the Greenspan days when we wanted to keep inflation around 1%). Considering those points, “Expanding The Balance Sheet” doesn’t sound so bad.
On the other hand, we are in unchartered waters, and there are NO historical markers that can guide any of the dancers. Who knows if the Fed purchases more bonds if long term interest rates will actually go lower? One economist suggested that:
“One reason for this belief [that QE2 is bad mojo] is that more and more investors are moving into bonds bearing low interest rates. Others are sitting on huge bond portfolios with embedded capital gains. Should there even be a hint of a policy change in the FOMC’s statements, in speeches, or in a change in the pattern of its purchases, rational bond holders and managers will run for the door to avoid getting caught. This raises the specter of a large rate shock that could trigger panic bond sales and spawn the next financial crisis.”
Music stops, everybody runs for their chairs…So what will the FED do?
The TARP program kept houses off the market, and on the Bank’s balance sheet. That protection is quickly coming to an end, and houses will come onto the market in a very hyper-local way. Housing prices in those areas might take another hit – or it could be a non-event as the difference between a 3 year supply of houses and a 4 year supply is just not that big a deal… kinda’ like the difference in 4.5% interest rates and 3.5% interest rates is not nearly as big a deal as the difference between 7.5% rates and 3.5% rates.
If housing takes another dip, even if it’s a small ripple, the Banks are likely to stop lending mortgage dollars, so the FED would be in a forced position of picking up the slack with an “expansion” of it’s balance sheet… purchasing mortgage backed securities again.
Until it’s CLEAR what will happen with housing in the next 90 days… and what direction will be coming from Congress due to the Elections, it’s likely that we will continue to have 9 or more Fed Presidents making speeches that sound like they are contradicting themselves. It’s my opinion that they will continue to play the slow march of musical chairs for as long as they can, and mortgage interest rates will remain in a bumpy low pattern for at least the next 18 months.
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