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April 9, 1995
Last week's gloomy forecast, which we warned might not last out the next week, made it two whole hours into Monday. Rates reversed, and finished the week back down to their lows of the year.
Early Monday, the bond market was in terrible shape. However, at 10:00 EDT, the Purchasing Managers' Index delivered the market-moving surprise: March economic activity dropped to 51.4%. The index was above 60% as recently as November, and 50% is considered no-growth.
Having last week overworked the negative, we'll make the optimistic case here.
For mortgage rates to fall below the lows which have prevailed since late February (roughly 8.625% at "zero and zero"), the economy must show new, pronounced weakness. The ghoulish gods of bonds are hoping for exactly that, and many believe it's already happening.
The believers have a lot of history, and cynicism on their side.
The history of economic cycles since World War II has been dominated by the Fed's efforts to "fine tune" the economy. Clear into the Sixties, bright Fedites insisted that the Fed could manage the economy so perfectly that there would no longer be successive overheatings, inflations, and recessions. But, there they were, all the same; up and down, boom and crash, recovery and recession.
The modern pinstripes, led by Mr. Greenspan, share little of the earlier overconfidence. Most believe that they must intervene to prevent inflation, but are painfully aware of their fallibility.
It is the nature of mistakes at the Fed which feeds current interest rate optimism, and cynicism. When the Fed is wrong, its mistake is nearly always to be too late, and then have to over-correct.
It's possible to argue that at the end of every tightening cycle for fifty years the Fed has either gotten too tight, or stayed too tight for too long, and every time produced a recession. The optimists fervently hope that the Fed has done so again, and will have to drive interest rates 'way back down in new over-correction.
This time, observers are about evenly divided. You can tell there's a debate underway because the financial press has all the damn airplanes out again. You can't pick up a newspaper or watch a show without: "Looks like a soft landingŠ", "The Fed has us on a nice, gentle glide pathŠ" from the Fedocrats. Meanwhile, the optimists growl: "We're already spiraling in for a hard landingŠ" and "You know the Fed always hits the trees trying to find the runwayŠ".
Until something lands or crashes, bet on the trading range: mortgages have held between 8.625% and 8.875% for nearly two months.
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