Ten-year Treasury rates have risen to 3.81 percent, roughly the same altitude as the tops last June, August and December; mortgage rates are still below 5.25 percent.
The increase has been caused by the usual worries: the Fed is going to tighten, the recovery is gaining strength, and the Treasury is borrowing too much money. Someday these forces will blow the eyebrows off the bond market, but this is not that day.
Mortgage applications have stalled at a level 18 percent below one year ago, and mortgage closings early this year are off more than that. January industrial production rose 0.9 percent, most likely a temporary spate of inventory-building, but it still counts.
However, industrial capacity in use is in deep recession, eight percentage points below the 1972-2009 average. New claims for unemployment insurance were expected to fall if only because of weather, and instead last week soared 31,000 to 473,000.
The Fed held center-stage: it released minutes from its January meeting; Thomas Hoenig, Kansas City Fed president, delivered a scary speech; and last night the Fed hiked the discount rate from 0.5 percent to 0.75 percent.
Fed politics are usually eye-glazing speculation. It does not leak, except on purpose, so if you weren’t there, you’re just guessing. The Fed often jawbones markets, and media and markets inevitably over-analyze. Also, the Fed is a deeply cautious institution that doesn’t do anything dramatic until the need is transparent to everybody.
In today’s conditions we can count on a few things. First, the Fed faces the worst political threats in its history. Congress wants to limit its regulatory oversight and emergency capacity; no matter how well the Fed did post-Lehman, Congress doesn’t want any other entity to have that kind of power.
Second, the Fed has to respond to critics certain that its monetary ease will cause serious inflation. Third, it fears political pressure to monetize runaway deficits (buy new Treasurys with invented cash).
The Fed’s response to the power-limiting threat has been to resume customary invisibility. Stop buying MBS now, even if it should buy, and undo all of the post-Lehman emergency programs. Of course, post-panic all had fallen into disuse, and all could be reactivated in a single morning. Artful stage-management without content.
Countering the inflation worriers is harder to do. In the last 27 years CPI was above 5 percent for one year (Iraq War I), but the worriers look at the ’60s-’70s charts and are just sure that inflation will be back any minute. …CONTINUED
The Fed is aware that the recovery is fragile, and is painfully aware that credit continues to contract at a double-digit pace. If credit is tightening on its own, what do you want us to do? Stop credit altogether?
(Sidebar: In the backwards world of bonds, premature tightening by the Fed is our dream of Christmas. Nothing takes down long-term rates faster than aborted recovery.)
In these circumstances the Fed is adept at the appearance of action. The Fed’s minutes said that it would soon sell securities that it had bought in the panic to create bank reserves, but was silent as to pace and magnitude.
"Excess reserves" in the banking system total $1 trillion, all in disuse because banks are short of capital; the Fed could put on a great show by dumping a few bonds, but have little tightening effect.
The hike in the discount rate brought gasps from the media and markets, but the discount rate is obsolete, and will have no current effect on credit. However, the move offers calm to the inflation worrywarts.
Then the miracle of the jawbone. The KC Fed’s Hoenig is a guaranteed source of inflation monomania and formal dissents in favor of tight policy. However, few outsiders know that he is an empire-building duffer.
He’s never worked anywhere but the KC Fed, and has installed himself as permanent president there — 19 years, three times the tenure of any other regional Fed-head. Instead of asking him to cork it (as Fed chairmen will do), let this bird preach on, and his choir will be happy.
The authentic signal in the minutes: the December set mentioned "housing recovery" a dozen times. These minutes: "Improvement in the housing market slowed."
Not time to tighten. Not at all.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.
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