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.”
The first, tentative 0.25% increase in the Fed Funds Rate (FFR) was on March 16, 2022 – several months after the Fed concluded that inflation was not, in fact, transitory. Indeed, during the period from last October to March this year it was still purchasing Treasuries and Mortgage-Backed Securities, thereby continuing to inject liquidity into the economy. And only recently has it ended its policy of reinvesting maturing bonds.
Between May and July the FFR has been increased by a further 2%, but the Fed did not “move quickly”. It moved quickly when it slashed rates in March 2020, but it has been way behind the curve in removing some of the excess liquidity its actions created.
“Does anybody think that (raising rates three months earlier) would have made a big difference?
Well yes, actually, several economists do. In the famous words of William McChesney Martin “the Federal Reserve is in the position of the chaperone who ordered the punch bowl removed just when the party was really warming up.”
As with so many other aspects of life – e.g. home prices – the basic equation of supply and demand applies with the economy. We know all about the supply chain problems since the pandemic. And there is nothing the Fed can do about those. But it can impact demand and should have started much sooner to restrain demand. But it kept pumping cash into the system long after the end of the emergency to which Quantatative Easing (QE) was part of the cure.
I don’t want to keep harking back to articles I wrote long ago (they are here), but I do know that I started to argue for a reversal of QE just about a year ago, some months after I had raised concerns that inflation may prove to be more embedded than the Fed believed (hoped?).
As Jon Farrow said on Bloomberg Surveillance on Friday morning, “the Fed says it is data-dependent, but we don’t know which data they are looking at or how they will react when they see it.”
So this week the stock market has decided that by the time the Fed meets again in September the economy will have slowed so much that the Fed will be able to ease off on its interest rate increases. Hence the big rally as “risk on” returns, betting that we will actually have a soft landing for the economy based upon the continuing strength of the labor market.
Or maybe it was just a strong, bear market rally from an oversold postion where “everybody” was negative.
I guess we’ll find out when we get the data – just don’t ask the Fed which data.
And these recent articles:
Economic and mortgage commentary
Recession? Yes, no, maybe….
Has Inflation Peaked?
Have Mortgage Rates peaked?
Are we already in a Recession?
Federal Reserve in Fantasyland: Implications for Housing Market
Time to Consider an Adjustable Rate Mortgage
How Marblehead’s 2022 Property Tax Rate is calculated
Essex County 2022 Property Tax Rates: Town by Town guide
Essex County Mid-Year Market Summary in 5 slides
Massachusetts Mid-Year Market Summary in 5 slides
How quickly are houses selling?
Have Home Sales slowed?
June Housing Inventory: still way below 2020 levels.
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, please contact me on 617.834.8205 or email@example.com.
Andrew Oliver, M.B.E.,M.B.A.
Market Analyst | Team Harborside | teamharborside.com
“If you’re interested in Marblehead, you have to visit the blog of Mr. Andrew Oliver, author and curator of OliverReportsMA.com. He’s assembled the most comprehensive analysis of Essex County we know of with market data and trends going back decades. It’s a great starting point for those looking in the towns of Marblehead, Salem, Beverly, Lynn and Swampscott.”
Andrew Oliver, M.B.E., M.B.A.
Real Estate Advisor
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