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June 27, 1997
Long term interest rates rose slightly this week, T-bonds from 6.65% to 6.75%, and mortgages closer to 8.00% on the low fee packages.
Freddie Mac's weekly report contributed its usual confusion, announcing that "mortgage rates fell to 7.58% from 7.61%". Freddie's survey has a four-day data collection lag, so it's always old news; and worse, the survey carries the antique assumption that everybody still pays an origination fee and a discount point.
Economic data continued to be strong, as consumer confidence set a new, 26-year record at 129.6; durable goods orders fell .6% in May, but the drop was only a modest unraveling of the 1.8% surge in April; and sales of existing homes rose 4.4% in May to a record 4.24 million per year. These home sales were the May closings of contracts written in March and April, when mortgage rates set their 1997 highs: lower rates now are likely to further stimulate an already hot market.
Despite strong data, the general consensus is that the economy is sufficiently "slow" and non-inflationary that the Fed will not raise its rate when it meets next Wednesday, July 2.
Whose consensus? There are 39 "primary dealers", firms big enough and brave enough to buy at auction all the bonds, notes and bills sold by the Treasury (and then mark 'em up and sell 'em to the rest of us). These dealers each employ teams of economists who do nothing but watch the Fed, trying to prevent bravery from turning to bravado, and disaster.
Not one economist at any of the 39 primary dealers has forecast a Fed tightening move next week. If the Fed does tighten, it will be an epic surprise. Also, any rise in job losses caused by such a move would begin in the economics profession on Wall Street on July 3.
It looks as though tax cuts are a done deal. The home sale exemption will double from $250,000 to $500,000, but remain a lifetime affair, not every two years.
There was one, truly disgraceful part of the tax cut proceedings: Dick Gebhardt's attack. "The lion's share should go to hard-working, middle income families!"; and then noted that 68% of the tax cut benefits will go to people with the top 20% of incomes, and 19% to the top 1%.
Mr. Gebhart can pursue any rhetoric he wishes, but I hope he won't mind a counter-charge of gross deception in his class warfare campaign. Mr. Gebhardt knows perfectly well that the top 24% of adjusted gross income filers ($50,000+ per year) pays 72% of all income taxes collected, and the top 1% ($200,000+ income) pays 28% of all dollars.
Why shouldn't the people who pay the taxes get the benefit of the cuts?
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