The mortgage market has held all of last week’s gains, and low-fee, 30-year fixed-rate deals are still near 6 percent. The 10-year T-note remained rock steady in a 4.45 percent-4.47 percent range.
This stability after such a big gain is remarkable in itself, and astonishing in that the bulk of the rate drop was caused by weakness in a single monthly employment report, the most notoriously unreliable of data series, and at the beginning of a “measured” but presumably merciless round of Fed tightening.
There are growing suspicions that economic softness may be more widespread than a single, anomalous report on jobs. We got only one tidbit of new data this week: “same-store” retail sales flattened in June to half the prior five-months’ average gain. Gold and dollar markets reinforced speculation that the Fed may have to back down from a straight-line return to a 3 percent-or-so “neutral” Fed funds rate, possibly taking a pass as soon as its August meeting. $40/bbl oil is sandpapering the economy, but thus far has not made a durable contribution to inflation.
Short of new data, there is only one subject to which to turn.
Politics…the Fed first. The Fed has no mercy, but it must have political support. Its chairman and governors are not elected, and its official priorities–jobs and a strong economy–are not its real ones. These are, in order: lender of last resort, stable prices, then a strong economy, and jobs take the hindmost.
Our willingness to take the Fed’s medicine is limited by how sick we feel, and by the extent of our self-discipline. In the former case, perhaps the main reason the Fed did not intercede in the stock market foolishness 1996-2000 was because the citizenry felt fine: the economy was booming, inflation was falling, and everybody was getting rich. Castor oil…for what? Appeals to American self-discipline are seldom worth the gas. We would much rather insist that the people in a different income bracket exercise their self-discipline.
If the Fed acted without the support of politicians, or without damn good foundation for it among the people, the chairman would quickly be hauled before Congress to explain why we have an independent Fed, anyway, instead of an annex in the Treasury basement.
The Fed is not afraid to act during an election campaign, but it would rather avoid any appearance of favoring one boob over another, and especially to avoid having itself and its actions become campaign air-hockey.
The Bushies are hoping that reduced tax brackets will provide ongoing stimulus, knowing that new cuts are not an option, not with a $550 billion Social-Security-inclusive deficit. They also know that an economic fade this fall will leave them with nothing but Iraq and tickets to Texas, a bin Laden Halloween grab or no.
Meanwhile, the Two Johns are talking about Two Americas (it’s closer to 300 million), promising to revitalize the economy, and to bring back manufacturing jobs that even fellow Democrats know are gone for good (see Robert Reich).
The reality is that there aren’t any more goodies for anybody to hand out. We’ve done that, and in the last three years it was the right thing to do. What the economy needs now is fiscal discipline–in spending, increased taxes, or both. Not some hair-shirt foolishness, like a balanced budget, or sky-high marginal brackets–just get the growth of government debt down to the level of economic growth.
Neither candidate will address the fiscal issue; hence, neither will have a mandate to deal with it. As the Fed has no help from the budget side, it thinks it has to lean into the deficit stimulus. However, citizens in a stalled economy may quickly lose interest in the merits of a neutral Fed funds rate.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at email@example.com.
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