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August 16, 2002
You can't really blame the Fed.
Stocks and interest rates fell hard Tuesday after the Fed's four-sentence announcement: we shift from risks-are-balanced to risks-toward-weakness, but we do not cut our Fed funds rate from 1.75%. The immediately following sensation in the markets: helplessness.
That sensation is not altogether misplaced. Still, don't blame the Fed. When under pressure, tell the truth. (Do blame the administration idiot who scheduled the Crawford cheerleading conference for a Fed-meeting day.)
The Chairman's highly optimistic testimony to Congress on July 18th was not an intentional cheerleading effort, but fell hollow and absurd, as his speech had been overtaken by the July stock market crash in process, and the visibly staggering economy.
On Tuesday, the Chairman had a chance to straighten things out, and he did: we are threatened by economic weakness, and there's nothing a quarter-point cut, or a half, or a full point will do to fix our situation.
Post-announcement, long-term interest rates have been all over the place. Early Wednesday morning, the 10-year T-note fell to 3.97%, last reached in May, 1963. Today, the yield has been as high as 4.29% (only 120 days ago, 5.45%). For a few hours on Wednesday, 30-year mortgages could be found at 6.125%, but Freddie's survey average for the week, 6.22% plus .6% origination, was about right.
The 10-year's wild oscillation was not reflected in mortgage rates. It's too technical for a family piece like this, but mortgages are moving the 10-year, not the other way around. When a huge wave of refinances is rolling toward the beach, markets have to adjust by setting equally huge hedging trades. Hedges are never perfect, and the imbalances show up in odd places as the wave crests, curls, crashes, and swishes flat.
There is such a wave in process -- the first refinance opportunity ever for the borrowers of a trillion or so dollars of loans with rates 7.625%-7.125%. I don't think we're more than half done with it, and the chaos while it's in process makes it very hard to measure probabilities for rates going forward.
If the stock market is forming bottom here in the Dow 8000s, then rates have bottomed. If not, they have not. If the economy is moving forward, economic growth suppressed to two-something, with occasional flat GDP quarters interleaved -- still the most likely case -- then mortgage rates are near bottom.
The most recent economic data confirm an uncomfortably high potential for negative-growth GDP quarters -- the dreaded double-dip. Consumer confidence continued to tank in August, down to an overall 87.9. Current expectations are okay, at 100.2, but confidence in the future... an abysmal 80.
Consumers go to work every day, and too many know that their employers are treading water. They know that if things don't turn around, those marvelous "gains in productivity" the Fed is counting on will cost them their jobs.
The Fed can't fix things with lower rates, but you can bet Mr. Greenspan is testing every valve and spigot in his system -- and he's got lots of them besides the overnight cost of money.
If we do double-dip, the ultimate recourse will be for the Treasury to spend a great deal of money, spraying greenbacks all across this parched nation. If the markets get the idea that the only way out of this predicament is monetary reflation, we'll see upward tilting interest-rate volatility we haven't seen since the '70s.
Rates can go lower, but this is a lousy place to fish for bottom.
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