Three straight weeks of mortgage-rate stability (low-fee loans 6.25 percent-6.375 percent) have concealed a truly unstable situation.

Most upsets in the financial markets coincide with fast-moving events, painful but well-understood, like the blown stock bubbles in ’87 and ’00, or the freight-train Feds in ’80, ’81 and ’94, or the foreign currency collapse in ’98. This time, markets are unstable because nobody really knows what the hell is going on.

Only two economic things of substance have changed this year: perceived employment weakness has shifted to the beginnings of job growth, and inflation has moved from slightly sub-1 percent to about 2 percent. Those are it–and long-term rates have soared a full percent in anticipation of another freight-train Fed.

We do not have any idea if the two-month job trend will sustain itself, or translate to wage growth. We do not know if inflation is in a ramping up phase, or if the rising measurements of inflation in the last 90 days are surprising only because we aren’t used to having any inflation at all.

We don’t know if accumulated gains in productivity will shelter us from inflation, or if deflationary pressures from technology and Asia will do the same. We don’t know if inflation can rise to dangerous terrain before wages begin to rise, or if rising prices versus flat incomes will stall the economy.

We don’t know if energy prices have risen to a new norm, though scarcity vs. demand makes it look as though the volatility range of $10-$30/bbl prevailing from 1980-2003 has been replaced by a new one, $25-$50/bbl. If we have reached a new and durable range for energy prices, we do not know if they will cost-push consumer prices, ’70s-style, or slow the economy, ’90s style, or produce nouveau stagflation.

Above all other unknowns, we do not know what or when or how much the Fed will do about any of these things, and neither does the Fed.

As teenage boys in search of a golf-course prank have known for generations, the first instinct of a trapped mole released on uncertain terrain is to dig. So it is for central bankers. Like this: “We know our 1 percent is too low, so…er, raising it must be the right thing to do. Slowly, of course, because…er, we don’t know how far we should raise it. If we go too slow, the bond market will panic at the inflation threat, but if they panic, then they will hurt the economy, not us.”

Cynical, you say? Disrespectful?

Fed governor Bernanke: “…Long-term interest rates have risen 100 basis points or more…Because of the impact of private-sector expectations about policy on long-term rates, a significant portion of the financial adjustment associated with the tightening cycle may already be behind us.” This, from the most clear-spoken Fed Ranger of the Greenspan era. Translation: We can follow bonds, which is damned handy cover in an election year, even though my chairman has just been reappointed (very nice of the Prez, considering my Chairman shot down his Poppa’s re-election). And, one more crater in the bond market like the one in the last 60 days, and we won’t have any economic acceleration or inflation to worry about.

Bill Gross, Grand Wizard of PIMCO, crafter of brilliant bond-market strategies, devoted his entire May/June commentary to the observation that the economy and bond market are on a circus high wire between inflation and deflation, and could fall either way. For this advice, the big bucks.

Me, I’ll take a guess. The forces for slowdown and rate containment are nearer and stronger than the bond market now thinks. There are a ton of people who would rather own a 5 percent-5.5 percent 10-year T-note than own the S&P 500, and there are even more who took a life vow to buy 6 percent 10s if they ever got another chance, which is one of the reasons they won’t get the chance, not in this cycle.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at


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