|
February 4, 1994
The Fed tightened monetary policy this morning. However, contrary to widespread rumor, the world has not come to an end, the sun will rise tomorrow, and mortgage rates are up only about an eighth of a percent to 7.375%.
More economic data from the end of 1993 confirm rapid growth late last year, but the newest news describes a flattening of that surge.
In reports of December activity, Construction Spending picked up 2.6%, Factory Orders rose 1.2%, and New Home Sales jumped 11.4%. January, on the other hand, brought a marginal rise in the Purchasing Managers' Index (to 57.7% from 57.1%), and a very weak 62,000 gain in Non-Farm Payrolls.
This weekend your clients will be on the receiving end of doom-saying from the popular press. In sepulchral tones, "The Fed has tightened, and Armageddon has drawn nigh." The media should be forgiven, as they have had nothing better to do for weeks than over-cover Tanya Harding and the Bobbits.
A change of subject may be a relief, but the average homebuyer needs some reassurance.
The Fed has moved to raise the Fed Funds rate (the overnight rate for bank-to-bank borrowings) a whole one quarter percent. This increase, from 3.00% to 3.25%, will have little immediate impact on Š. anything.
It seems like a big deal because the Fed hasn't changed policy at all since September '92, and this is the first move to raise rates in five years. (There are 28 year-old traders on Wall Street who have had most of a career, gotten rich, and never seen the Fed tighten.)
Though a reversal in form can be unsettling, this may be the most telegraphed punch in history. Mr. Greenspan has warned of this move monthly since last May; no one should be surprised that there finally was a wolf out there.
Conspiracy theories abound. The standard one holds that there is a terrible fight between the Fed and the White House. Not so: the White House undoubtedly had advance knowledge, and has grudging acceptance of necessity.
Reality is not so exciting as conspiracy.
If the Fed waits to cool the economy until inflation is obvious, it is too late to stop inflation without drastic measures. Since World War II, the Fed has been too late every time, and has had to raise short term rates above long term ones in order to ice inflation. There is a long way to go (three full percent) before Fed-engineered rates get anywhere near that pain threshold.
Mr. Greenspan and his colleagues are attempting something new, and courageous: pre-empting inflation before it gets going.
A Fed willing to try to head off future inflation, despite new, relatively weak reports, is the best possible news for long term, fixed mortgage rates.
ARMs, however, are overdue for a rough ride.
|
