Mortgage interest rates have stabilized, but any other financial stability at the moment is an illusion. Each new cabinet appointee and tweet flurry brings more understanding of policy ahead.
- President-elect Trump clearly intends business-friendly policies, but some pro-business policies in theory don’t turn out that way in practice.
- The Fed's rate-hike next week is a cinch; depending on the effects, it could give ammunition to those who say it should be confined to a mathematical formula.
- In the outside world, Trump’s elevation has changed nothing economic, which leaves the Fed raising rates while the rest of the world is still easing.
Mortgage interest rates have stabilized, but any other financial stability at the moment is an illusion.
Each new cabinet appointee and tweet flurry brings more understanding of policy ahead.
On the domestic side, this will be the most anti-regulatory administration ever. Whether also the most business-friendly since Coolidge, we’ll wait to see. The Tweet-Elect clearly intends it to be the most business-friendly, but some pro-business policies in theory don’t turn out that way in practice.
The Fed and its meeting next week
At the top of that list is the Fed. Its rate-hike next week is a lead-pipe cinch. That hike, together with the language the Fed uses and its new dot-scattergram, may launch the greatest tweet-storm in history.
A right-wing mob has asserted for a generation that the Fed should have its wings clipped. Some support for trimming Fed powers has been nothing more than Congressional envy: “If anyone around here is going to have a lot of power and screw things up, it’s going to be us.”
A close cousin: Congress does not want anyone or any institution to be independent of it.
A really bad crew, more technically minded, insists that the Fed gets policy wrong so often that it should be confined to a mathematical formula. They still blame the Fed for the credit bubble, perhaps the leader in today’s fake news.
In particular, there is Jeb Hensarling, Chair of House Financial Services, who rammed a Fed-limiting bill last year through the House (the Senate declined). Hensarling would also shut down Fannie and Freddie — not privatize, but eliminate.
Two other key people on the transition team, Steven Moore and David Malpass, are Fed-hostile screwballs escaped from the Wall Street Journal editorial page.
There are, however, plenty of people on the Trump team who understand the importance of an independent Fed with a broad charter.
But we’ve heard nothing from them about the Fed, and nothing from His Tweetness since he ripped Yellen during the campaign.
Will next week’s rate hike catalyze a chat? Will Yellen limp slowly in a grim-duck final year? Who will be appointed to the two vacant governor positions, and with what portfolio?
If Trump and new Treasury Secretary Mnuchin wanted to reassure the bond market and head off another run up in rates, they could do two easy things.
First, say that Yellen has done a good job and will be considered for re-appointment (even if fibbing).
Then say that although the administration intends economic stimulus, it shares the Fed’s target of 2 percent inflation.
If you’re pro-business, the Fed is your friend. Low interest rates follow low inflation.
Don’t be cute. Do not suggest that growth is more important than inflation. The bond market will instantly interpret any proposals to confine the Fed as preliminary to easy money and inflation. Threaten bond traders by tweet or carrier pigeon, and they will beat you senseless.
The outside world
Shift to the outside world, where Trump’s elevation has changed nothing economic.
The European Central Bank (ECB), in a murky announcement on Thursday, said it would taper QE (quantitative easing) but not taper QE.
In rough translation, the ECB, like the Bank of Japan, will allow long-term yields to rise a little (part of the reason ours have risen) and push short-term yields to deeper negative.
Driving down long-term yields did not get the economic bang that central banks had hoped, although of course they know that higher ones will hurt.
However, the absence of spread between short and long rates was slowly destroying insurance companies and banks, hence the need to engineer some steepening in the short-long spread. The ECB will be easier than ever, just by different means.
Which leaves the Fed raising rates while the rest of the world is still easing, with powerful consequences for the dollar, emerging nations, China — and possibly a temptation to Elect and his minions next week. Tweet on, Oh Ship of State!
This week’s data
Of all the election data and analysis, this one from the Brookings Institute takes the prize. I hear a lot of Trump-gloating, more than after any election in memory (and correspondingly unprecedented fear among Democrats).
One aspect is centered on the vast national red-scape on national maps. I am a forthright believer in the electoral college, and have no objection to any candidate’s electoral victory yet a popular-vote minority. The analysis in this piece goes a long way to explain the frustration (and fear) among the majorities in red counties, and the sense of two Americas, blue islands floating in a sea of red.
This analysis should not be used for counter-gloating (as the authors seem to have intended) — its purpose should only illustrate the growing economic gap between red and blue counties, and probably a cultural counterpart. (With thanks to expert Realtors Mike Malec and Paul Dart.)
The 10-year T-note five years back, more likely coiling for the next move up than about to retreat. For retreat we’ll need some lousy economic news. Break 2.50 percent going up, and we’ll begin a test of the 3.00 percent tops in 2013-2014.
The 2-year T-note, the great Fed-indicator. Note the spread to 10s widening — watch that spread next week, after the Fed tightens, to see if it closes. The traditional warning to the Fed that it’s headed for too-tight is a 2s-10s spread which narrows and finally tips upside down. Chart is also five years back.
The Atlanta Fed GDP (gross domestic product) tracker. The U.S. economy is enjoying some acceleration, from 2 percent-ish to perhaps 2.5 percent.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at firstname.lastname@example.org.