Recession? Yes, no, maybe……..
When I proposed to my wife, she was taken by surprise and responded: “Yes, no, maybe.”
I was reminded of that response while listening to all the conversations in recent days about whether or not the US already in, is about to be in, or will escape a recession.
A lot of the confusion relates to the question: “how do you define recession?” and “who gets to decide if it is a recession?”
And no, it’s not by Punxsutawney Phil looking for his shadow.
What is a recession? (more…)
Federal Reserve tries to rewrite history
Two comments from Federal Reserve Chair Powell struck me while I was listening to his Press Conference on Wednesday:
On the “speed” of the Fed’s move to increase rates:
“When inflation changed direction, really, in October. We’ve moved quickly since then. I think people would agree. But before then, inflation was coming down month by month. And we kind of thought we had the story. Probably had the story right. But then I think in October, you started to see a range of data that said no. This is a much stronger economy and much higher inflation than we’ve been thinking.”
Moved quickly? (more…)
Has Inflation Peaked?
After I published Have Mortgage Rates peaked? last week a reader asked me why I thought the yield on the 10-year Treasury Bill would not continue to increase, so that even if the spread over the 30-year Fixed Rate Mortgage (FRM) narrowed, the FRM rate itself might still increase.
In Are we already in a Recession?, published on June 18, I wrote: “Just as the yield on 10T has more than doubled since pre-COVID while the Fed Funds rate is unchanged, so the Fed Funds rate can increase sharply – the Fed is forecasting it will reach 3.4% this year, also double its pre-COVID level – without necessarily impacting the yield on 10T. That will depend upon the economic outlook. Ironically, perhaps, the more determined the Fed is to drive down inflation – even at the cost of a recession and higher unemployment – the greater the chance that the yield on 10T – and by extension the FRM – will decline – at some point.”
In the last few days, as more economists talked about a recession after the Atlantic Fed updated its Q2 GDP estimate to minus 2.1% (it was 0% when I wrote on June 18), the yield on 10T has dropped sharply, falling to 2.9% from a peak of 3.5% in the middle of May: (more…)
Have Mortgage Rates peaked?
With all the noise about the determination of the Federal Reserve (Fed) to continue to increase interest rates it might be tempting to asume that mortgage rates will continue to rise.
But I believe there are good reasons for thinking that mortgage rates may have peaked. Read on to find out why I think this.
Current rates
The 30-year Fixed rate Mortgage (FRM) reached its highest level since 2008 this week: (more…)
Are we already in a Recession?
In January this year I published an article asking Can the Federal Reserve prevent a Recession?
My question now is: Are we already in a Recession?
I think the answer is yes. Here is the evidence, in three charts: (more…)
Federal Reserve in Fantasyland: Implications for Housing Market
Immediately following the issuance of the Federal Reserve’s decision on Wednesday to increase the Fed Funds rate by 0.75% and the accompanying, optimistic statement and press conference, both bonds and equities rallied strongly, leading some to think – hope – that the worst was over in markets.
And then came Thursday, when equities resumed their plunge and bonds rallied further – on the belief that a recession was now likely. (See my Are we already in a recession?).
For my part, were it not so serious I would have allowed myself a louder chuckle as I heard Chair Powell say that the Fed would be “data-dependent” – and then forecast that inflation – using the Fed’s preferred measurement – would be 5.2% this year, 2.6% in 2023 and 2.2% in 2023. Based upon what “data” exactly? And what does all this mean for the housing market?
Fantasyland
If you google “Federal Reserve and Fantasyland” you will get a lot of hits. And while many of the comments from Wall Street insiders – particularly those working for investment banks who tend to be optimists – were supportive of the Fed, many of those with perhaps more objectivity were in the fantasyland camp.
The response to COVID
The world’s economy faced a major shock and challenge with the outbreak of COVID. In response the Fed acted swiftly – cutting the Fed Funds rate by 1.5% in two weeks in March 2020 – and with shock and awe – a huge program of Quantitative Easing – injecting vast amounts of liquidity into markets. The Fed became the main buyer of Government and Mortgage-Backed Securities (MBS) and its balance sheet doubled from $4 trillion to over $8 trillion: (more…)
Will the Federal Reserve show chutzpah today?
In my How far Behind the Curve is the Federal Reserve? report last weekend I suggested that the Fed needed to increase its Fed Funds rate by a full 1.0% today to regain control of the inflation narrative and asked if it has the chutzpah to do this.
The following table shows clearly that it has been the market fighting inflation by driving up interest rate – while the fed has continued with its easy money policy.
We’ll find out in a few hours how serious this Fed is about getting inflation under control.
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Florida Lawmakers Pass Insurance, Condo Reforms
Why are Mortgage rates so high?
Florida Regulator: Insurers Can Offer Roof Deductibles
Expansion Plans for Fort Myers Airport
- Andrew Oliver, M.B.E., M.B.A.
Real Estate Advisor
Andrew.Oliver@Compass.com
www.TheFeinsGroup.com
www.OliverReportsFL.com
m: 617.834.8205
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How far Behind the Curve is the Federal Reserve?
In March 2020, as the impact of COVID-19 was being felt, the Federal Reserve cut the Fed Funds rate by 50 basis points ( 0.5%) on March 3 and followed that with a 100 basis points (1%) cut on March 15th – a total of 1.5% in under two weeks. This emergency action was decisive and instrumental in preventing a financial disaster. But the economy quickly bounced back with a huge rebound in Q3 2020. The emergency was over.
The Fed, however, kept pumping huge amounts of cash into the economy. Eventually, the market decided that the Fed was behind the curve and market rates took off. Yet the Fed has been slow – make that very slow – to respond. This chart shows interest rates on January 31st 2020, the trading day before COVID-19 was declared to be a public health emergency in the US, and this Friday after the announcement that the Consumer Price Index rose 8.6% in May from a year earlier.
Does anything strike you about this chart? Such as the fact that all the market interest rates are up anywhere from 50% to 130% – and the Fed Funds rate is still way down from its pre-COVID level. (more…)
What Higher Mortgage Rates Mean for the Housing Market
The recent uptick in mortgage interest rates is having a chilling effect on home buyers at the moment, but Wharton real estate professor Benjamin Keys doesn’t expect that to last.
Mortgage interest rates have increased across all categories in the last several weeks, following the Federal Reserve’s first rate hike since 2018 to fight inflation. The interest rate on a 30-year fixed-rate mortgage topped 5% last week, compared with less than 3% a year ago. The jump corresponded with a 40% drop in mortgage applications from a year ago.
“Aside from a few days in 2018, we haven’t seen rates this high persistently since around 2011,” Keys said. “Mortgage rates are the real focus among a lot of people right now, and trying to understand what impact [that is] going to have on housing markets.”
Sky-high rents have been spiraling faster than home prices in the last decade, which will continue to push many Americans toward home ownership. With a fixed-rate mortgage, they can budget a stable monthly housing expense for the next 15 or 30 years. (more…)
Why are Mortgage Rates so high?
Yes, interest rates are rising and with that so are mortgage rates, but the 30-year Fixed Rate Mortgage (FRM) seems to be about 0.5% higher than I would expect.
First, current rates:
In my recent article The Federal Reserve and Mortgage Rates I explained the link between the FRM and the 10-year Treasury yield (10T). The difference – the spread – has average around 1.7% over time, but with significant fluctuations during periods pf stress.
Here is the chart highlighting the spread at the time of Federal Funds rate changes – and as of this week: (more…)
Time to consider an Adjustable Rate Mortgage
As 30-year mortgage rates (FRM) continue their recent vertical ascent, it is worth considering an Adjustable Rate Mortgage (ARM).
Here are the latest rates:
ARMs got a bad name in the boom that contributed to the Great Recession, but as in so many different situations, that was the result of lax – or no – underwriting standards – think liar loans – and loans with adverse features such as negative amortisation – payments so low, initially, that the loan balance increased over time.
All that changed with the passage of the Dodd-Frank Act in 2010. (more…)
U.S. Takes Step to Regulate Cryptocurrency Market
Cryptocurrency home sales barely have a toehold, and a new exec order from Pres. Biden may change the rules. The order suggests regulation and a U.S.-owned version.
Over 100 countries are exploring or piloting Central Bank Digital Currencies (CBDCs) – a digital form of a country’s sovereign currency.
“The rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier, but also has substantial implications for consumer protection, financial stability, national security and climate risk,” according to the Executive Order.
The Order lays out a national policy for digital assets across six key priorities: consumer and investor protection; financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.
Executive Order key points
Federal Reserve: “Make me responsible…. but not yet”
With apologies to St. Augustine the gist from the release this week of the minutes of the last meeting of the Federal Reserve Open Market Committee (FOMC) was that, yes, inflation is worse than we expected, and yes, we need to raise interest rates and, yes, we need to sell some of our huge portfolio of Treasuries and Mortgage-Backed Securities, and we will …soon…I promise.
“Participants observed that, in light of the current high level of the Federal Reserve’s securities holdings, a significant reduction in the size of the balance sheet would likely be appropriate,” the meeting summary stated.
The minutes show concern about inflation and financial stability though members urged “a measured approach” to tightening monetary policy. FOMC members noted that “inflation was beginning to spread beyond pandemic-affected sectors and into the broader economy.”
No kidding. (more…)
Earth to Federal Reserve: What are you waiting for?
As the debate amongst economists continues as to whether the Federal Reserve will raise interest rates 3 times, 5 times or 7 times this year, the Federal Reserve continues to do….nothing.
Giving the market advance warning about changes in monetary policy is an excellent idea, but the lack of flexibility from the Fed is alarming. The Fed has consistently said that its decisions as to the timing of the end of its bond buying program – which has glutted stock and real estate markets with cash – and the start of the “lift-off” in interest rates would be “data dependent.”
Well, my question is this: what data are you seeing Mr. Powell that the rest of us are missing? And by the rest of us I mean professional and award-winning economists – and me..
In March 2021, 11 months ago, Chairman Powell said: “We’re not going to act pre-emptively based on forecasts for the most part, and we’re going to wait to see actual data. And I think it will take people time to adjust to that, and the only way we can really build the credibility of that is by doing it.”
Also in March 2021, I published “Party on, dude” says the Federal Reserve which included: (more…)
Can the Federal Reserve prevent a Recession?
The housing market is driven by the balance between supply and demand. Supply cannot be increased significantly quickly, so the only way for the booming housing market to slow is if demand drops. And the most likely causes for a drop in demand are either a major geopolitical development – such as Russia invading Ukraine and the US and its NATO partners deciding to respond militarily – or a recession.
Since World War II there has been a consistent pattern of the Federal Reserve hiking interest rates to control inflation and thereby triggering a recession. With the Fed finally acknowledging in late November that inflation was not transitory and committing to end its bond buying spree and also raise interest rates, will it be able to avoid a recession? Can this time be different?
The Boston Globe recently carried an excellent article on this subject by Jim Puzzanghera: ‘A hellishly difficult task.’ Can the Federal Reserve lower inflation without causing a recession?
“The virus is unpredictable. People’s responses to the virus are unpredictable. It’s not a garden variety business cycle by any means,” said Donald Kohn, a senior fellow at the Brookings Institution think tank who served as Fed vice chair from 2006-10. “It’s much harder to peer into the future and know how to calibrate your monetary policy.”
Bernard Baumohl, chief global economist at the Economic Outlook Group, a forecasting firm, was more blunt. “The Fed has a hellishly difficult task right now,” he said. “There is absolutely no history for the Fed to lean on to deal with this kind of inflation.”
Most economists predicted last spring that high inflation would be temporary, pointing to the supply chain problems caused by restarting the US and world economies. But some economists warned the $1.9 trillion COVID aid bill enacted last March risked fueling longer-lasting inflation by pumping too much money into the already recovering US economy.
By last June even I was writing: “Should inflation prove to be more persistent than the Fed expects, then it is likely that the Fed will have to start to increase interest rates sooner and move them up more quickly than it currently expects. And mortgage rates would follow.
The Fed’s two goals of price stability and maximum sustainable employment are known collectively as the “dual mandate.” In explaining its policy of keeping interest rates low – in part by buying large quantities of Treasuries and Mortgage-Backed Securities, the latter helping to keep mortgage rates low – the Fed refers to the still high level of unemployment.
I have to admit that I struggle to understand how low interest rates, which boost asset classes such as stock prices and real estate, are helping to boost employment. Lower interest rates benefit those who own assets which appreciate.
I would like to see the Fed start to reduce (taper) its bond buying, while encouraging Congress to focus on removing barriers to employment – by providing increased child care allowances, for example. In other words, deal directly with the problem rather than hoping that benefits will trickle down somehow.”
Some quotes (more…)