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Chairman Greenspan laughed off questions about whether a housing bubble existed back in the spring when he appeared before Congress. A few months later he talked of ‘mini’ bubbles in the market but reiterated that a nationwide housing bubble was something that typically would not happen. After that, however, Fed speak about the housing market started showing up in speeches and in the Fed minutes.
As we have noted over the past few weeks, the Fed is continuing to provide reasons for raising rates despite economic signals that show the economy is slowing in the face of sustained high gasoline prices. Consumers have shifted to discount sellers and are slowing their purchases even at those stores. That is the most recent and significant turn in the economy of late, and it follows a string of data that shows slowing. Nothing that is suggesting a nosedive, but indications of slowing. Even the bond market continues to hold flat, just as it has for the past 7 months. That indicates despite the continued advance of the economy, money is not anticipated to be in higher demand and thus driving rates higher. There are a number of postulated reasons for this ‘conundrum,’ but with the yield curve flat with the Fed raising rates and draining money supply and with oil doubling in a year along with gasoline prices, one ready conclusion, one that history has repeated over and over again, is that the markets are telling us there is economic slowing ahead.
Despite the signals, the Fed remains steadfast with its plan to hike rates up from the current low levels. As we have said before, we have no problem with that. Rates need to be higher for the future and there has been plenty of economic growth. As with most things, however, timing is everything. Right now may not be the best time to pursue rate hikes given the rise in oil prices and the obvious impact on the consumer already.
As we noted early in the year, the Fed would likely, regardless of the other economic indications, focus on a goal and provide rationale for reaching that goal even after it appeared it should back off. That goal was crystallized in Greenspan’s Friday speech when he stated that the imbalance in the housing market could be “rectified by adjustments in prices, interest rates, and exchange rates.” This is part of a discussion about avoiding the problems associated with asset imbalances. Greenspan calls the housing market an economic imbalance and he says it is the preferred policy to address it with monetary policy. The Fed is now focused on ‘fixing’ the housing bubble it sees having developed. It has its focus and it is likely to see it through unless something abrupt and nasty happens.
Greenspan also talked of how investors were willing to take less compensation for risk, becoming desensitized to the risks as they perceive the change as structural. As long as there is plenty of liquidity this is not a problem. Greenspan noted that liquidity can readily disappear, and when it does the result shown by history is painful. Greenspan warned in November 2004 that people should be hedged for asset revaluations. The Fed was raising rates and was not going to stop at that juncture. The Friday speech covering the same issues is saying the same thing. We warned at that time this was an ‘irrational exuberance’-type comment, and we see it as the same type of comment this time.
As we have noted over the past few weeks, the Fed is continuing to provide reasons for raising rates despite economic signals that show the economy is slowing in the face of sustained high gasoline prices. Consumers have shifted to discount sellers and are slowing their purchases even at those stores. That is the most recent and significant turn in the economy of late, and it follows a string of data that shows slowing. Nothing that is suggesting a nosedive, but indications of slowing. Even the bond market continues to hold flat, just as it has for the past 7 months. That indicates despite the continued advance of the economy, money is not anticipated to be in higher demand and thus driving rates higher. There are a number of postulated reasons for this ‘conundrum,’ but with the yield curve flat with the Fed raising rates and draining money supply and with oil doubling in a year along with gasoline prices, one ready conclusion, one that history has repeated over and over again, is that the markets are telling us there is economic slowing ahead.
Despite the signals, the Fed remains steadfast with its plan to hike rates up from the current low levels. As we have said before, we have no problem with that. Rates need to be higher for the future and there has been plenty of economic growth. As with most things, however, timing is everything. Right now may not be the best time to pursue rate hikes given the rise in oil prices and the obvious impact on the consumer already.
As we noted early in the year, the Fed would likely, regardless of the other economic indications, focus on a goal and provide rationale for reaching that goal even after it appeared it should back off. That goal was crystallized in Greenspan’s Friday speech when he stated that the imbalance in the housing market could be “rectified by adjustments in prices, interest rates, and exchange rates.” This is part of a discussion about avoiding the problems associated with asset imbalances. Greenspan calls the housing market an economic imbalance and he says it is the preferred policy to address it with monetary policy. The Fed is now focused on ‘fixing’ the housing bubble it sees having developed. It has its focus and it is likely to see it through unless something abrupt and nasty happens.
Greenspan also talked of how investors were willing to take less compensation for risk, becoming desensitized to the risks as they perceive the change as structural. As long as there is plenty of liquidity this is not a problem. Greenspan noted that liquidity can readily disappear, and when it does the result shown by history is painful. Greenspan warned in November 2004 that people should be hedged for asset revaluations. The Fed was raising rates and was not going to stop at that juncture. The Friday speech covering the same issues is saying the same thing. We warned at that time this was an ‘irrational exuberance’-type comment, and we see it as the same type of comment this time.
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