|
April 20, 2001
Yes, yes, Mr. Greenspan surprised the world again, but his newest rate cut was no help to mortgages. Low-fee deals are closer to 7.50% than to 7.00%, as they were before the Chairman's latest move.
Thirty-year Treasury yields, 5.21% a month ago, reached 5.70% last week, dipped to 5.68% for a few hours immediately after Wednesday's ease in the overnight Fed funds rate, and then finished this week trading at 5.80%.
The Fed is "easing" and "cutting"... and mortgage rates are rising? Why?
The answer begins with a well-established historical pattern. Bonds and mortgage rates tend to have their best days when the economy is slowing, but before the Fed begins to ease. December '00 marked the spot, this time: mortgage rates had a few better days in January, but no whole week has been any better than that last week of December.
Once the Fed intervenes to rescue the economy, investors lose their safety-driven motivation to buy bonds and mortgages. The credit markets presume -- deeply believe -- that a Fed determined to save the economy will succeed. The markets have good grounds for this conviction: in the last nineteen years there has been only one recession, and it was a dish-shaped affair hardly worthy of the name.
The credit markets further believe that the greater the Fed's determination to rescue the economy, the greater the likelihood that the Fed will overdo the job and create too much growth coupled with a rising risk of inflation, which further discourages bond-buying at the onset of a rescue.
The asinine whining that the Fed is not easing fast enough or far enough has caused some people to miss the vigor of the Fed's operations in 2001. This is no "fine-tuning", or adjustment; this is a flat-out rescue effort.
In its whole history, I can't find a time when the Fed cut its rates as fast and as deeply as this one: in the 105 days since January 3, Mr. Greenspan has cut the Fed funds rate from 6.50% to 4.50%, by roughly one-third, and there will be more on May 15.
(The runner-up to 2001: from 14.2% in June 1982 to 9% the following December. In the single recession cycle since then, the Fed cut the Fed funds rate by two-thirds, from 9.75% to 3.00% -- but the trick took three-and-a-half years, February 1989 through September 1992.)
The extraordinary rescue effort underway is having an unpleasant effect on the bond market for one other extraordinary reason: there is not yet any direct evidence that the economy is or soon will be in a recession.
It may happen, of course, and the Fed is justified in its action, but mewling from the likes of Cisco is not the same thing as a recession.
|
