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April 19, 2002
All week long, mortgage rates were steady near 7.00%, depending on the fee package. Freddie Mac's early-week survey finding, released yesterday, at 6.94% inclusive of .7% "origination" fee seems a tad higher than the market.
Stability is not what you would expect in a week of Alan Greenspan testimony, a coup reversal in Venezuela ("Chaos in Caracas") taking oil prices above $26/bbl, sour prospects for technology (Microsoft, Nokia, AOL, BellSouth), and just-okay prospects for smokestack businesses (GM).
A .7% jump in industrial production got a lot of attention, but this third straight monthly gain dragged aggregate production just a smidge ahead of last September's. Not a great month, there.
The Chairman's testimony for once added to market stability, as it completely removed the threat of a tightening move in the near term, and maybe all summer.
The Fed funds rate sits at 1.75%, last that low in 1961; last lower on a sustained basis in 1958. Fedologists measure the relative tightness or ease of a given Fed funds rate by its relation to the inflation rate; the gap between the two is thought of as the "real" rate. Inflation is hell to measure accurately, but a 1.50% rate in 2002 is as good a guess as any; relative to that figure, the real cost of overnight money is only a quarter of a percent, very easy.
Okay, sooner or later the Fed will introduce a higher real cost of money, raising its rate even if the inflation rate remains at this lovely one-something.
We learned in the testimony that higher is not coming sooner, and the longer it is until the Chairman detects the need for higher, the better the chance that the Fed's rates in the next cycle may not be very high. Only two months ago, most folks were confident that the Fed would briskly take its rate back to the 3.50% prevailing before September 11th, and then tighten into a strengthening recovery.
Some bond market grumps found risk of inflation in the Chairman's reluctance to tighten, but ignored the Chairman's concern for the economy. The peak of the last tightening cycle was 6.50% in 1999, and the prior low was 3.00% in 1993; in the cycle before that, the high was 9.85% (1989), and the low 5.85% (1986); in the cycle before that, the high was 11.64% (1984), the low 8.51% (1983); then (gulp) 19.10% (1981) and 4.61% (1977).
We've been in a process of disinflation for twenty-five years, each Fed cycle lower than the preceding. There is no evident driver for rapid economic growth: not profits, not employment, and a boost from a rapid rise in asset values -- stocks and homes -- is not in prospect.
While a 1.75% Fed funds rate clearly defines the bottom of that staircase, long-term rates may have one more step to descend.
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