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August 18, 1989
Mortgage discounts continue to rise this morning despite the announcement of a small .2% rise in the Consumer Price Index. However, the underlying rate of inflation continued to hold near 5%. Inflation watchers were not reassured by Wednesday's news that oil imports exceeded 50% of total U.S. consumption for the first time since 1977.
The economic data pattern is disturbing for those who prefer lower interest rates. Industrial Production gained .2%, the first rise in three months, and Capacity Utilization remained steady at a high 83.6% rate. Housing starts rose for the second straight month, up .8%, though applications for building permits are still weak.
The bond market reacted badly to good news on Thursday: the Trade Deficit improved to $8.17 billion. However, much of the improvement came in recordhigh exports, which indicates an improving economy.
Are interest rates just in a temporary correction from the huge drop since March? Or are at risk of 11% mortgages again? As uncomfortable as we may feel, rest assured that the Fed is downright nauseated.
Though the Fed Funds rate has only eased from 9.75% to 9.00% since March, the Fed actually eased much more. In June and July, fearful of recession, the Fed poured bank reserves into the system. This printing press effort has shown up as the largest short term bulge in the money supply in Mr. Greenspan's term.
Suddenly the economy looks stronger, and the Fed has rereversed its field. After all the soft vs. hard landing jazz, what seems likely now is a ground loop. The Fed eased too soon: we may be right back where we were last fall with an accelerating economy and a tightening Fed.
In a typically helpful effort, the politicians have gotten involved. Last Sunday, the Budget Director Mr. Darman (a born carpetchewer) announced that the Fed was too tight, and any recession would be due to an excess of Fed caution. On Monday, the White House spokesman Mr. Fitzwater said no, not really, the Fed is "doing a good job." On Wednesday, Mr. Bush volunteered that he pretty much agreed with Darman. Fortunately, the President is going fishing for three weeks.
Mortgage rates may not get as high as 11%, but the selling pressure from disappearing S&Ls alone will keep rates out of single digits.
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