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August 11, 1989
This morning's news is almost as good as last Friday's was bad, and mortgage discounts are falling a half point or more. The Producer Price Index, the principal measure of wholesale prices, fell a surprise .4% in July. The guess all week had been for a .2% rise in the index. Retail Sales rose .9%, but not enough to frighten anyone.
The only other data released all week was the Fed's Beige Book estimate of the economy as a whole, which indicated a gradual slowdown, but no recession nearby.
Today is the first happy day for interest rates in the last ten. We have had a wonderful joyride down from 11.5% mortgages since March, and some pause (correction, retracement, retreat) was inevitable. The questions now are: Will we see 9.00% again soon? Stay where we are? Back up to 10.50%?
Nobody knows. No Man's Land. Deep water. Foggy out there.
The Fed isn't going to ease again until the economy shows more weakness. Today's wholesale price number is too good and too isolated to stampede a cautious Fed. Fighting inflation is the whole purpose of the Fed's exercise this last year, and Greenspan continues to say the the goal is "zero inflation." Even with today's good report, wholesale inflation will push 5% for 1989.
Meanwhile, there is fierce political pressure on the Fed to ease. Treasury Secretary Brady has been a semiprivate Fed basher, apparently feeling that the inflation battle is won. Brady announced at the signing of the S&L wipeout bill that "interest rates would fall" because of the bill. Greenspan, at the same table, reacted politely to Brady's tortured logic and said no, they won't either.
Look for continued swings in interest rates over a widerthannormal range until we get a better read on the economy. In this environment, mortgage discounts can bounce plus or minus three points in a week.
Homebuyers don't have averages to bail them out: closings are one shot bets with all the chips. Try to limit the optimistic gambling to those who can afford to be wrong.
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