Morning Report: New guidance from the Fed

Vital Statistics:

Stocks are flattish this morning as we await Jerome Powell’s (virtual) Jackson Hole speech. Bonds and MBS are up.

Second quarter GDP was revised upward from -32.9% to -31.7%. Consumption was revised up as well from -34.6% to -34.1%. Separately, 1 million people filed for unemployment the first time last week.

Home prices rose 11% in the week ending August 16, according to Redfin. The Redfin Homebuyer Demand index increased by 29% from pre-pandemic levels earlier in the year. “Schools are beginning to start again, and it seems like that has slowed the amount of homebuyer activity a little bit, but that doesn’t make the market less crazy,” said Oakland, Calif.-area Redfin agent Veronica Clyatt. “Instead of 20 offers on a home, you may ‘just’ see 10. But prices have not gone down—home price increases haven’t slowed at all.”

Fan and Fred will continue to buy loans in forbearance through September 30, extending the previous deadline of August 31. “MBA and its members appreciate FHFA and the GSEs extending these important features,” said MBA President and CEO Bob Broeksmit. “Both the origination flexibilities and the program to purchase loans in forbearance are providing important stability to the mortgage market during the pandemic, and today’s announcement will enable lenders to continue to make low rate mortgage financing readily available to consumers and avoid the inevitable credit tightening that would have resulted from their expiration.”

Democratic presidential candidate Joe Biden has proposed a $15,000 first-time homebuyer tax credit. Supposedly they could use the credit when they make the purchase instead of having to wait to file taxes. The details haven’t been ironed out, which is typical for campaign promises.

The Fed has updated its statement on its longer-run goals for monetary policy, strengthening its commitment to a stronger job market. “The economy is always evolving, and the FOMC’s strategy for achieving its goals must adapt to meet the new challenges that arise,” said Federal Reserve Chair Jerome H. Powell. “Our revised statement reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome increase in inflation.”

One change is subtle but important: they replaced the term “deviations” from full employment to “shortfalls” from full employment. This basically codifies what Janet Yellen alluded to years ago, that the Fed will allow the labor market to run hot for a while. This essentially means that the Fed will remain supportive to the labor market when the economy is below full employment, and will be reluctant to take away the punch bowl when we are at full employment.

The bigger question is whether this is just wishful thinking. As we saw before, as the level of government debt rises, the velocity of money slows. And the US economy took a quantum leap upward in indebtedness in response to COVID. Which means talking about a super-hot economic growth in the US makes as much sense as talking about super-hot economic growth in France or Japan. Punch line: we are looking at lower rates for longer, at least at the short end of the curve. The big question is whether the Fed will continue to purchase the 10 year to drive down longer-term rates.

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical View all posts by Brent Nyitray