|
Long-term rates have fallen to
the mid-December lows, and show almost every sign of going lower. The
10-year Treasury has reached 3.83%, and the lowest-fee mortgages are
5.875%.
The immediate drivers of
decline: nosedives in brand-new data for December. $100 oil got the ink on
Wednesday, January 2nd, but the bond-market mover was the purchasing
managers’ manufacturing survey at 47.7 -- a five-year low, below the “50”
breakeven level into contraction, still a hair above the 44 level marking
recession. Today’s payroll data... maybe a hair above recession, maybe
not: December unemployment jumped to 5.0%, the .3% leap the largest
single-month in twelve years; and payrolls gained a meager 18,000 jobs,
government-heavy, the private sector declining.
Not quite off the table-edge:
hourly earnings actually increased at a 5% annual slope; and the
service-sector purchasing managers’ survey is still positive at 53.9.
We don’t see any market mechanism that would intercept a significant
slowdown, now. A recession might or might not ensue -- technically two
consecutive quarters of negative GDP growth -- but the December pattern is
not likely to reverse. The credit crunch is still in place, clenching
gradually tighter and tighter, more than counteracting the Fed’s rate cuts
thus far.
NEXT ISSUE
2007 ISSUES
RETURN HOME
|
So, for mortgage rates, what’s
with the “almost” in the lower forecast?
The one thing that could mess up a drop in mortgage rates to the low
fives, maybe breaking the 5.25% ’02-’04 bottom: a rescue. There is only
one that would work: the asset-firewalling bailout of the financial system
recommended here for months, but the public is still far too angry at bad
actors for that. Which leaves bad ideas for rescue.
Friday, Chairman Bernanke and
Secretary Paulson met with Mr. Bush at the White House. Oh, to be a fly on
the oval wall. Did the visitors tell Dad what happened to the family car,
or will equivocation and procrastination prevail? This administration
leans to market solutions or tax cuts. Fiscal stimulus might be in order,
following Larry Summers “Three T’s” rule: timely, targeted, and temporary.
Quickly cutting FICA taxes to zero below a certain income limit is a
reasonable, never-tried idea, but Dubya and this Congress will never get a
tax cut done in time, or properly.
The only other non-bailout
rescue is monetary policy. Translation: BIG cuts in the 4.25% overnight
cost of money, and going inter-meeting -- the January 30 and March 18
schedule is a long time to wait.
© 2008 - Economic Notes is published weekly by the Economics Department of
Universal Lending Corporation. |
Here is the compound and
circular problem with that rescue: the bond market won’t like the
inflationary consequences. The economy and especially housing need lower
long-term rates; if the Fed appears to abandon discipline, long rates will
rise no matter how far the Fed cuts. As morning trading wears on, that
very thing is happening: bonds are losing early gains.
We have struggled to
understand the Fed’s silence since August, and its apparent failure to
comprehend the magnitude and consequences of the credit crunch and to act
accordingly. Re-reading the testimony, plowing through recent meeting
minutes leads to an alternate theory, down William of Ockham’s road to
simplicity of hypothesis (“Ockham’s Razor”). Mr. Bernanke is neither blind
nor passive. When the Fed said in October that risks to growth and
inflation were balanced, he meant exactly that. Both risks were awful,
still are, but inflation is the more dangerous of the two.
The appropriate Fed policy
cannot be discussed in public. No Chairman can tell the American people:
“We will be slow to ease on purpose, following the economy downhill,
making no effort to pre-empt recession until inflation is clearly under
control.” A Chairman can embark on a public fight against inflation only
when the public feels its pain; Bernanke must engage in brinkmanship to
hold inflation below the 2% bound -- a priority on nobody’s screen except
bond investors.
It’s the only way to get
long-term rates down, and to achieve a durable rescue.
|
