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September 16, 1993
Mortgage rates rose above their dead rock bottom lows this week.
More important for home buyers trying to time their locks, volatility returned to the bond market, and rates swung as much as a quarter percent from day-to-day.
A .3% rise in the Consumer Price Index got a lot of attention, and coincided with a bad day for bonds, but is not a signal of increased inflation. It's just not as good news as the market needed to hold the interest rate lows.
While markets raced up and down, the Fed continued a pattern of quiet, semi-public comment.
A press conference is public comment; while a careful, written response to questions from the Senate Banking Committee is only partly public.
The former is often an effort to jawbone the markets, while the latter is designed to keep politicians under control, and may even be the truth (heaven forbid) as the Fed knows it.
In Chairman Greenspan's answer to the Senate, he repeated the same basic theme he has held all year: short term interest rates are too low, and will have to go up someday.
His measure of "two low" is in relation to the inflation rate. The inflation rate since winter has been stuck at about a 3% annual rate. Hence, a T-bill yielding 3.00% pays no "real" interest, it just returns the inflation rate.
A "zero real rate of return" can be too generous, and risks over-stimulating the economy. Zero or negative rates are useful only at the bottom of a recession, when the economy needs resuscitation.
Though the Fed is prepared to raise short term rates at the slightest sign of renewed inflation, there is another, more likely near term future.
No change at the Fed, but in an economy as weak as this, a zero real rate is probably "high" enough push inflation lower, and allow lower long term rates.
The Fed has played a very patient game. In the last year, it has not changed short term interest rates at all, and been richly rewarded.
In this last year, while T-bills held at 3.00%, 30-year bond yields (and mortgage rates) have dropped more than 1.50%. At the Fed, this is the sure sign of a collapse in expectations of future inflation.
The Fed would like to see those expectations collapse some more, at least another percent in relation to T-bills.
Perhaps the only obstacle in the Fed's path is potential intervention by politicians, who may try to force the Fed to ease going into the 1994 election year.
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