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March 2, 2001
Mortgage rates bottomed this week, as low-fee deals fell close to 7.00% for the first time since early February.
The counter-intuitive linkage between the Fed, the stock market, the economy, and the bond market continues to confound the consuming public. And, interest rate confusion aside, it's a shame that elements of black comedy have been overlooked.
For example... on Monday, a large number of stock market spokespersons tried to jawbone the Fed into an emergency, inter-meeting cut in the Fed funds rate. Led by past Fed governor Wayne Angell (television persona: Kansas-accented Yoda), these mouthpieces filled the air- and ink waves with claims that the economy was in recession and sinking fast into something much worse.
The stock market soared in expectation of an immediate half-point cut from the Fed, certain to arrive before the Chairman's testimony to the House on Wednesday. Why, everyone knew the Chairman couldn't show up to testify without acting beforehand to rescue the economy.
Meanwhile, mortgage rates stayed up near 7.50%. Bonds are a buy going into recession, but not if the Fed is going to save the economy.
Tuesday... no Fed, no cut, no rescue, and what-in-the-world-are-stock-prices-doing-up-HERE!?! Mortgage rates began to fall as stocks collapsed.
The Chairman's actual testimony on Wednesday hurt stocks some more: the economy is still slow, but there is no emergency, for heaven's sakes; and certainly no reason to bail out the stock market. The Fed will ease on March 20, but nothing dramatic.
Mortgage traders were delighted. If no Fed rescue, then no quick recovery; and if the Fed sits on its hands long enough... well, there's hope for a recession after all.
That's how our super-sophisticated markets really work: sit around and hope the Fed blows it, too easy or too tight.
The data say the Fed has it right: the economy is slow but not in recession. Distortions aside, orders for durable goods were solid in January; the National Association of Purchasing Management noted an uptick in the February economy, and vehicle sales are strong.
Consumer confidence in future conditions has fallen sharply, but confidence in current conditions is still very high -- and the gap between the two is the widest ever. It's a hunch, but this pattern is exactly what we should expect from the wealth effect running in reverse: our jobs and incomes are fine, and our homes continue to rise in value; but the decline in the value of our retirement accounts makes the future look a little thin compared to a year ago.
Thin is one thing, and recession is something else.
Thin won't get mortgages into the sixes.
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