August 24, 2003
Notes: Internal Fed Divisions
Ah. Interesting:
WSJ.com - Fed Officials Play Down Recovery,
Suggesting Continued Low Rates: ...there was new evidence that Fed officials were more divided than usual on the right interest-rate move at their June 24-25 meeting, which may have played a part in bond markets putting too much weight on the remarks of more pessimistic officials. In the days preceding the meeting, only five of the Fed's 12 regional banks had voted for a quarter-point cut in rates; three had voted for a half-point cut and four voted for none at all. Boards of regional banks vote on the little-used discount rate, charged on short-term loans from the Fed to member banks, which moves in tandem with the federal-funds rate. The Fed's seven governors in Washington vote on such requests. The Fed released minutes to the governors' deliberations on discount rate requests Thursday...
It is unusual for there to be such a big divergence in the Fed's view of the world.
Posted by DeLong at August 24, 2003 12:00 PM
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The FED must take some responsibility for this summer's volatility in gov't yields. First all this "unconventional measures" then suddenly replaced by rates-on-hold-for-foreseable-future. Gov't yield vola then amplified through morgates + this NYTimes leak about computer models showing Fannie's volatility hedging possibly totally insufficient. What's gonna happen, the WSJ tries to guess:
As Rates Rise, Building Stocks
At Risk If Economic Pace Lags
By ERIN SCHULTE
THE WALL STREET JOURNAL ONLINE
The ripple effect of rising mortgage rates has reached Wall Street.
Homebuilders have been dealt a blow. After peaking in mid-June days after yields on 10-year Treasurys hit bottom, the Dow Jones home-construction index -- including names like Centex, Lennar, Pulte and Toll Brothers -- has fallen 8.3%, even as the Dow industrials edged higher.
But they're not the only companies over which homeowners hold much sway.
There's a broad swath of businesses that peddle to builders, fixer-uppers and new-home owners: the Black & Deckers and Whirlpools and Mohawks of the world. The companies that fill up the shelves at Home Depot and Lowe's include makers of everything from carpeting and flooring to windows and cabinets.
In the past month, the Dow Jones household durables index, which includes tool and hardware companies like Black & Decker and Stanley Works, was the fourth-worst performing industry group tracked, with a loss of 3.2%.
Industry analysts say the selling may continue, but the question is, for how long, and how deep?
"I worry more about the stocks than I do about the fundamentals of these businesses. The perception when we start to get some consistently negative housing numbers is quickly reflected in the stocks," says Eric Bosshard, an analyst for FTN Midwest Research in Cleveland.
"Rising mortgage rates and a dropoff in refinancings are going to negatively affect these companies this year," he says. "Nobody knows for sure when or what the impact will be, but we all know there will be an impact."
The frenetic housing market is indeed showing signs of a slowdown.
...
The divergence of opinion reflects the uncertainty of the economic situation or the uncertainty of the effect of rate cuts on the economy. The liquidity trap and whether rate cuts do more harm than good once rates drop below 1% are certainly questions. The other factor is that interest rates must stop somewhere north of zero. Therefore the Fed has only a limited number of bullets left and may not want to use them all now and have only drastic measures available.
The administration fiscal policy is causing a lot of economic uncertainty. Yes they are running deficits and have increased spending by quite a lot. However, spending increases are for military expenditures much of which go out of country. Tax cuts are given primarily to the wealthy and do not directly target the lower classes that are most likely to spend it. Thus, given the size of the spending increases and deficits the US is running, a stimulatory effect on the economy should be present. However, the way the money has been distributed leaves the real stimulatory effect in question.