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April 22, 1994
Though the Fed tightened again on Monday, and the so-called "prime" rate rose at banks, mortgage rates had their best week since the Easter massacre.
This trading pattern left a trail of confused commentators and consumers, while politicians are beginning to react to a tough-minded Fed.
New information on the economy in the next two weeks will define mortgage rates clear into June. The first estimate of 1st Quarter GDP arrives on Thursday, April 28: growth in excess of four percent, and mortgages will go directly to nine. Friday, May 6 is the day for April jobs statistics: a weak report could mean we have already seen the mortgage rate highs of the year.
The Fed is making progress.
Its' prior two hikes in the Fed funds rate (3.00% to 3.25%, then to 3.50%) appeared to be too little and too late. The danger sign was a huge rise in long term interest rates -- triple the magnitude of the Fed's tightening.
This latest move (Fed funds to 3.75%) produced exactly the market behaviour the Fed is looking for. Short term rates like prime went higher, but long term investors, reassured about inflation, bid bond prices higher and long term rates fell.
Confused civilians everywhere: no matter what Tom Brokaw's buddies have to say, a rise in the prime rate has nothing to do with mortgage rates.
The Fed tightened in a way that sent more signals than a quarter percent increase would suggest by itself. Nobody expected the Fed to tighten before its next meeting on May 17 (when the Fed will tighten again, to at least 4.00%). The Fed rarely moves on Mondays (traders with hangovers are too jumpy), which made this move feel like a painful, but routine part of an inexorable process.
The single best indication of progress by the Fed is opposition by politicians. The best line came from Senators Sasser and Sarbanes, who held a joint press conference to complain about the threat of good government: "Just as the economy is coming up for air, the Fed shoves it back down." That, of course, is exactly what the Fed is supposed to do, and why Congress can't be trusted with the job.
President Clinton, presumably caught in Bosnia-think, knowing he should approve of the Fed's move, decided it was okay because it didn't matter: "This is still within the range of interest rates that should not do anything to harm the economy." Bill, the whole idea is to harm the economy.
The goldest of gold stars to Treasury Secretary Lloyd Bentsen, presumably old enough not to fear the truth. On CNN, knowing the Fed is taking rates higher than expected: "Šwe were forecasting approximately a 4.00% rateŠ" And, asked if he was unhappy with the Fed's tightening, said, "No, I'm not." Could we promote this guy?
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