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September 22, 1989
This week's inflation data continued last week's pattern: the monthly figures show zero inflation, while the underlying "core rate" continues at 4.55%. With no help from the Fed, the bond market had a shaky week, and mortgage discounts rose.
The economy continues to grow at a modest pace, and there are no new signs of weakening employment. Though August Housing Starts fell 5%, new Building Permits rose 3.5%. The August Consumer Price Index was unchanged.
Most students of the American economy agree that economic equilibrium doesn't last long. That is, we tend to be either sliding into a recession or growing so fast that prices tend toward inflation. The credit markets have been puzzled by the apparently steady state of the economy since late summer. The pronounced weakness of July has not been reinforced any more than what looked like rapid growth in early August.
Though we can describe the economic growth rate as modest, the economy is operating at a very high percent of capacity. The Fed is still running a tight book, nervous about the persistently high underlying rate of inflation.
All rate watchers are trying to predict which way we will go when the steady pattern slips on its skates. The guess here for the last month has been slightly higher rates for a month or two, and that's what we got this week.
However, there are signs of deflation out there which seem lost in the "core rate" debate. An ounce of gold has lost 15% of its value in the last year, trading down to $360/oz. Energy prices have not been able to sustain spikes over $20/bbl. Increases in wholesale prices of manufactured goods cannot be passed through to final prices the automobile price war is the leading example. The dollar has gained value, making imports less expensive.
Close to home, real estate has its deflationary elements. The S&L bailout reflects half a trillion dollars in real estate which is no longer worth (maybe by half) what it was when the loans were made.
So I'll reverse field now, and expect the Fed to react to better price news with an easing move in October sometime. However, any par mortgage at 9.5% or better should be grabbed in a hurry.
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