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May 23, 1997
Oh, well; nobody's perfect. Despite widespread expectations (in this space spread as wide as any), the Fed left its interest rate unchanged at 5.50%.
As is often the case, T-bill traders had the right forecast: 90-day T-bills paid a yield lower than the Fed funds rate going into to Tuesday's Fed meeting, and that optimism (complacency? Diehards unite!) was well-placed.
So, mortgage rates have come down also, in relief that the Fed is standing pat?
No. You just can't please all the people all the time:
Before Fed meeting This morning
90-day T-bills 5.24% 5.18 (down .06)
30-year T-bonds 6.88 6.98 (up .10)
That's right: no Fed, and bonds had a bad week. Mortgages didn't lose much ground, but have moved back to 8.25% from 8.125% (at "pointless" 30-year rates).
How can this be? Well, only two months ago, the Fed felt it necessary to raise the Fed funds rate .25% to pre-empt an incipient threat of inflation. Nobody in the bond market believes that a single, .25% tightening move will pre-empt anything, whether incipient, latent, or rampant.
Where did the inflation threat go? Your average bond trader is twenty-something, too smart for his or her own good, and prone to an uncharitable attitude toward the Fed.
"So, you [deleted deleteds]. You scare the [deleted] out of me for two [deleted] months, do [deleted] nothing, and expect me to buy your [deleted] bonds? Sure. You bet."
From the perspective of this, average trader, the Fed meets again on July 2, when it may (1) return to a painfully pre-emptive mood, (2) continue to ignore the threat which it announced in March, or (3) enjoy the great good fortune of an economy slowing down all by itself.
Thoughts one and two are bad for bonds, and three is a matter of good luck. Until such good luck should appear, there isn't enough positive motivation to buy bonds, and take rates below the 6.85-90% bottom for bonds, or the 8.125%-8.25% one for mortgages.
The upside risk is more substantial, as report after report shows a gradual overheating in the labor market. Today, in classic good-news-is-bad-news, we learn that in the last year the labor force has grown by 2.7 million workers, the largest gain in a decade, and double the corresponding population growth. Good news, but what happens when we run out of employable workers, and employers begin to bid against each other?
Manpower, Inc., to hang onto its temps, has given everybody a 5% raise. Wendy's: 4% raises in each of the last two years, starting pay now $5.65/hr, almost a buck over the minimum. Burger flippin' ain't what it used to be.
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