The lowest-fee 30-year mortgages reached 6 percent Friday morning following the 10-year T-note’s approach to 4.4 percent, both rising after a modest surprise in job creation and wages. Going higher, soon.
July payrolls beat the 180,000-job forecast gain by 27,000, and the June figure was revised up by 20,000, but these variations are way inside the range of error in the survey. Some legitimate concern might flow from a .4 percent perk up in wages, flat-lined in the three years previous, but there is no inflation danger or economic acceleration present in this report.
Other data were garbled by the Great Car Giveaway, as American makers in June began to dump vehicles at cost at the rate of a couple of million a month. A rebound in the purchasing managers’ manufacturing survey may reflect renewed economic momentum, or just the Giveaway. Retail-store merchants have blamed poor July retail sales on consumption stolen by the Giveaway; could be…could be effects of $62 oil, or a year’s worth of Fed rate increases.
Whatever. The Fed has made up its mind, and that’s all that matters.
Federal Reserve Board Chairman Alan Greenspan has taken public his frustration with low long-term interest rates in a manner unprecedented in his 18-year term. He had similar things to say about the stock-market bubble, but took his time, from “irrational exuberance” in 1996 to “unsupportable” in 1999. In just six months he has called bonds a “conundrum”; then last month referred to the market’s “unrealistic expectations”; and on Wednesday a semi-official leak in the Wall Street Journal engraved the Fed’s annoyance at the bond market’s failure to follow instructions.
For Greenspan to be correct, $25 trillion worth of bond investors have to be deluded, or idiots, or both. Not just here, but worldwide: all interest rates everywhere are influenced by U.S. bonds. As they are, U.S. long-term rates are higher than comparable trading partners’ (the German 10-year is 3.37 percent, Japan’s, 1.39 percent).
Stocks bubble easily: stock prices don’t follow any predictive model for long, and investors are easily deceived by hopes for earnings, or discovery of the next Microsoft or Google. Bonds…buy a 4.25 percent 10-year Treasury note, and you earn 4.25 percent each year, and then get your money back minus inflation. That’s not the stuff of irrational exuberance.
The Fed’s determination to prove bond investors wrong will surely succeed if it tries hard enough, but it takes some serious chutzpah to insist that the entirety of a conservative, $25 trillion market is mistaken.
The Fed has justifiable concern that low long-term rates are making it harder for it to do its job. If bond yields had moved to 5 percent-5.5 percent by now, taking mortgages to 6.5 percent-7 percent, perhaps the Fed would be able to stop raising the overnight cost of money at 3.5 percent, where it will go on Tuesday. But, with the 10-year at 4.4 percent and mortgages still six-ish, the Fed has to press on with its only tool, hiking the Fed funds rate perhaps well above 4 percent, trying to push long-term rates higher.
Trying to slow the economy with short-money alone is awkward. Remember the last time you had to drive a nail into a ceiling? Fed funds at four-plus means prime at seven-plus, hurting all kinds of business and consumer credit but not laying a glove on housing. Home equity lines of credit and ARMs are adjusting upward, but combined are less than 20 percent of mortgage debt.
I think the Fed’s return-to-neutral, remove-excessive-accommodation interval has concluded, and the Fed is now intent on the traditional interception of an overheating economy. Doing so by hammering upward while balanced on a stepladder makes the effort more accident-prone than usual. The accident is more likely to be a market somewhere breaking than a gentle slowdown.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at firstname.lastname@example.org.
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