Today’s news of slowing job and wage growth has mortgages in retreat from another run towards 7 percent, and the 10-year T-note down to 5.01 percent from a 5.2 percent May high. A Fed pause at its June 29 meeting is again a medium probability.
The employment numbers provide substantial support for Federal Reserve Chair Ben Bernanke. In the last month he made plain his belief in a soon-ahead inflation-dampening economic slowdown, and his desire not to overdo the Fed’s 2-year, 16-hikes-so-far campaign. For his pains he has been widely criticized as an inflation-fighting pantywaist. News that May payrolls and wages grew by only one-third of forecast is exactly what he needed.
The purchasing managers confirmed a May cooling, down from 57.3 to 54.4, and commodity prices backed down — all but the one that matters, oil still $70-plus.
The most accurate housing-market numbers come from OFHEO’s House Price Index, suffering only from time delay: 1st-quarter nationwide home-price appreciation fell to the lowest level in two years. 8.12 percent ain’t bad, but it’s very likely to go lower; from 2004 going all the way back to 1990, only three quarters enjoyed annualized appreciation as high as 8 percent.
This latest (now concluded) lurch upward in rates followed release of the minutes of the Fed’s May 10 meeting. The bond market got them right, but the media blew it, and have also failed to explain to civilians the usefulness of these minute records.
Releasing minutes at only three-week lag is brand new (the prior Fed Chairman — ol’ what’s-his-name — took a dim view), but Bernanke likes transparency. The press mistakenly jumped on a minute reference to a potential “.5 percent” increase in the Fed’s rate, but the sentence also mentioned of leaving the rate unchanged. If you visit www.federalreserve.gov to read these things, remember that 95 percent of the content is just a couple of dozen bankers and staff kicking the can from sideline to sideline.
The quotes causing rates to rise: in four separate places participants emphasized inflation risk higher as of May 10 than at the prior meeting in March. That’s why 5.25 percent is still in prospect on June 29 despite slowing economic data.
The element of civilian interest in each of these sets of minutes is Bernanke’s inclusion of the Fed staff’s forecast. Prior Fed chairmen never wanted the world to see these forecasts in real time (they were released on five-year delay!) for three reasons: first, not to tip the Fed’s hand; second, not to reveal how frequently the Fed forecast is wrong; and third, not to be confined by the forecast. One prior Fed chairman for four years in the late 1990s ignored the forecast risk of overheating and inflation, believing his pants-seat hunch that technology-pushed productivity would remove the inflation risk from above-trend growth. Nice call, that was.
Despite occasional nobody’s-perfect error, the Fed staff forecast is the best one available anywhere, and on May 10 it called for slowdown ahead.
Perhaps the biggest and best news of the week was Henry Paulson to Treasury. This is one tough SOB. He is not a trader, a la Robert Rubin; he is what The Street calls a “deal guy,” having spent his whole life pushing clients to act in their best interests over their strenuous objections. He is also a fellow Goldmanite with new White House Chief of Staff Josh Bolton (not a coincidence), was an under-talented but All-Ivy offensive tackle, a lifelong Republican, and rarest GOP of all, a green one, a chairman of the Nature Conservancy.
No power on earth could make this guy take a potted-plant job in the lamest-duck administration since Hoover. Nobody knows what to do with Iraq, but in the 30 months remaining, Dubya has a chance to undo some of the damage done by financial misadministration — excessive spending the top target.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at firstname.lastname@example.org.