Wed 8 Aug 2007
Fed Remains Biased About Inflation Bias
Posted by Jonathan J. Miller under Federal Reserve[10] Comments
The Federal Open Market Committee met yesterday. Many expected the Fed to hold the federal funds rate firm. They did not dissappoint disappoint.
Here’s the WSJ’s helpful interpretation of Bernankespeak called Parsing The Fed.
The recent credit crunch development is the likely to accelerate the erosion of the housing market in markets that are already weak. Its inevitable that housing is going to provide a drag on the economy. Before this past month’s credit-related festivities, I had been looking to the Fed to drop rates in order to influence mortgage rates to drop and keep the housing market from slipping further.
Now I am not so sure.
The Fed remains biased towards inflation prevention and I suspect that mortgage rates won’t be impacted so it seems like this FOMC was a non-event as it relates to housing. The flight to quality has pressed investors into treasuries, driving down yields, but lenders are tightening underwriting or pulling out of the mortgage market, so the scarcity of lenders could prevent mortgage rates from falling or even them drive up, no matter what the Fed does.
There is political pressure being applied towards expanding the amount Fannie Mae can puchase in order to loosen credit.
Someone I know closed on a no-doc home equity loan last friday. The program is being discontinued this friday. We are hearing feedback from lenders that other programs are being discontinued, although I was surprise programs like this still exist given how loose the standards are, so its no surprise.
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August 8th, 2007 at 9:36 am
Will the credit squeeze trigger a reversal in the NYC condo market? To date, the Manhattan market has seemed to buck the national trend but I am curious how or if the support structures that have stabilized the current condo/coop market will be adversely affected by the credit situation.
August 8th, 2007 at 10:23 am
Once again I found your commentary most fascinating and love the creativity you show by using non-traditional spelling of common English words. I assume you are using ‘dissappoint’ to indicate that you were insulted by the FOMC’s language even though you weren’t disappointed by it.
August 8th, 2007 at 10:34 am
Clark – Thanks. The extra “s” was for “savings.” I was skateboarding in the hall instead of sitting in my 8th grade English class taking notes with a red ball point pen.
August 8th, 2007 at 12:51 pm
Do a return to the rules for conforming mortgages constitute a “credit crunch?” Or normal credit? I think that latter.
And that will require a return to normal prices, relative to income. NYC will not be immune to his, unless a city with 3.2 million housing units can end up like Venice, almost entirely owned by rich foreigners.
August 8th, 2007 at 12:58 pm
[...] So Easy And Why It’s Tightening (and some excellent commentary on this subject) – in short, getting loans is getting harder. But … the free market is resilient and [...]
August 8th, 2007 at 1:05 pm
WT – great point. I agree – its the latter, although I think lenders will overcorrect initially in response to the problem until they catch their breath. Its interesting that as the housing market accelerated in 2003, then 2004, signs of overheating in many markets incentivized lax lending practices.
August 8th, 2007 at 3:09 pm
With respect to Octavio’s question- NYC is an international city and the NYC condo market seems to be benefiting from the weak dollar. My sense is that the stong interest of foreign buyers will keep the market appreciating during the period of tightness in the credit markets. Jonathan, do you agree?
August 8th, 2007 at 3:17 pm
Andy – yes I do agree. Foreign buyers often pay cash or use alternative financing rather than traditional lenders. I am not saying it won’t have any impact, but I would think the effect would be muted.
August 8th, 2007 at 5:50 pm
4 agreed! Its just a return to normalcy without the excess that we got used to. I think this is completely healthy and the term credit crunch used today doesnt mean what it used to.
However, I am hearing from the grapevine signs of distress from people I know in the bond markets and hedge fund worlds. I dont think the bad news is done coming out and I think selling into strength with these stock rallies is a good idea.
I think transparency is a good thing, and I just want the damage to come out sooner rather than later so free markets can adjust, reprice risk, and move on. I hope we dont hear really big bad news down the road because the fund managers or corporate execs tried and failed to ride it out.
August 8th, 2007 at 10:17 pm
I am suprised that you think the Fed will cut to bail out the housing market. Isn’t this the thinking that got us her in the first place (ie the Greenspan put)? As for the mortgage industry, lending guidelines are changing dramatically from day to day. The industry and Wall Street are trying to figure our the correct risk assessment to be applied to certain mortgage types and LTVs/CLTVs.
As for Fannie increasing their portfolio size, I think the effect will be pyschological in nature. I say that because the credit crunch is for all things non Fannie and no Freddie.