My Mortgage Blog

The obvious issue today? What can we read in the Fed's decision to neither raise nor lower interest rates?


The answer, of course, is "Not much." But--though the decision was effectively a careful avoidance of deciding--it seems to have been the right choice. Here's why.


For many months, the financial markets across the world have worried about what the Fed would do with interest rates. Note that the Fed was charged with making a decision for the world's markets, not just for those of the U.S. The various economies of the world are more closely interlocked than ever. Not only do we have to worry about what Germany or Greece will do next and how it will affect us, we also have to throw into the analysis the potential effects on foreign economies of what we choose to do.


This can be as tricky as trying to remain standing in a moving hall of mirrors. It is, further, tremendously difficult to predict where we will be tomorrow.


Keep in mind the fact that the Fed's decisions about changes to interest rates here in America can have a powerful effect on foreign markets. Higher American rates--even slightly higher rates--can push up the cost of doing business in foreign markets and that, in turn, generally means a slowdown in the sales of goods and services abroad. In other words, American companies can themselves be hurt badly if we raise the cost of borrowing and of using American money for foreign companies. That's why foreign economic leaders have for months been strongly advising the Fed to leave rates pretty much where they are.


Now, there has been an on-going argument between economists who believe our economy is strengthening enough to require raising rates enough to keep inflation from rising. Other economists, noting that we haven't seen much higher inflation for years, suggest that we don't need to base our policy on something that really isn't happening yet. But most economists, it seems, are confident that our economy will continue to firm.


Neither side won in the latest Fed decision. Indeed, that decision could be said to affirm that we just don't have a good enough idea of where the economy is headed, and we need time to figure it out. That's a refreshing humility.


Of course, what that means is a continuation of the argument. But that may be a good thing. As many have recently argued, there is no reason to rush this decision. It can wait. We can, for a change, let the national and world economies tell their stories for a while.

Whether we will benefit from the time we've been granted remains to be seen, as does the amount of time we'll have for reasoned analysis. It's an unusually important time, if that's possible, to watch the sometimes inscrutable moves of the Fed and the economy.

Posted in:Real Estate and tagged: Mortgage
Posted by Nick Rapplean on September 22nd, 2015 4:45 PM

As most readers of this update are well aware, one of the biggest questions that have been concerning people who help originate mortgage financing has been when and whether the Federal Reserve would start to push interest rates higher.


Remember: Higher mortgage rates result primarily when the markets begin to foresee a high rate of inflation, because higher mortgage rates--and higher interest rates in general--tend to slow down an overactive economic market. Simply put, higher rates add further costs to things, and thus the purchases of many key items slow because they cost more.


Inflation, therefore, grinds sales and purchases to a slower speed. A lack of inflation, though, generally means that the usual market resistance to its own systems of brakes and balances isn't working well enough, and we face the possibility of stagflation or even deflation.


It's reasonably important to keep this back-story in mind as we look at recent figures, many of them splendid, in the overall market and real estate sector.


The break-away change appeared in April's new home starts and permits for further new homes. For a long time going nowhere, the starts and permits broke onto higher ground. We have been waiting for this--waiting for higher new construction figures to suggest that the new home market is at last moving into creating more of the housing units we so obviously need. We've been constructing maybe 800,000 homes (annualized) in a good month where in fact we really need about 1.5 million.


With supply falling so far behind demand (and, in fact, behind our society's need) the prices of new homes may threaten to rise too high--and of existing homes as well. Not a healthy condition.


At the same time, though, builders miss out on an opportunity to build and sell a lot of product, which is why they're in the business, after all. And many other negative things result, including the ability to take advantage of construction and related jobs as the market stirs to life.


Happily, that's not occurring. And one of the clearest views of what IS happening can be gained by an analysis of what's happening in our jobs market, which is undergoing what economist Mohamed El-Erian today called a "healing."


All the pieces are falling into place for a recovery in our jobs market that is potentially sustainable and strong. Today's jobs report demonstrated the best monthly growth in years. With U.S. Treasury investors expected higher yields in the near term (today, in fact) Treasury yields began to climb significantly. And with an expectation of a faster-growing national economy, Treasury yields are rising.


Intriguingly, the news is a double-edged sword for the stock markets, which usually fare poorly when interest rates are rising. But for bond yields, in this case, there is no such problem. If yields are going to rise, they are indeed going to rise.


So we can expect higher mortgage rates, higher yields, and more concern that the Fed may squeeze rates even higher. All of this, obviously, suggests we may want to prepare for higher rates. But it still isn't a certainty. As El-Erain said, we're in the midst of "one of the loosest tightenings in history." Absent is the usual sense the rates have changed directions and are unlikely to reverse course again,


It is a time, therefore, to keep watching closely. Let's do that together. If you have any thoughts or questions, we're all ears.

Posted in:Finance, Mortgage and tagged: FinanceMortgage
Posted by Nick Rapplean on June 13th, 2015 12:42 PM

The recent real estate data are strong enough already to have broken economic analysts into two lines--one filled with people saying, "Glory be," we have an economic rebound here in the real estate sector and it deserves our heartfelt gratitude. The other line is filled with people worriedly declaring that we're rising above the hoi polloi in a bubble and, head for cover, because the sky may be preparing to fall. Again.


But let's cut to the chase.


Though we have seen strong numbers, especially related to new homes, they haven't been precariously strong. In fact--as I hope we can see--we're still a plentiful distance from anything that might be called a bubble.


So why are so many analysts so ready to worry about the recent numbers? The reason, primarily, is that real estate data--especially new homes data--has been like the boy who kept crying "wolf." The reports that all was well in the real estate sector just haven't held up over time. So a great many analysts are dubious about further reports of resilience in the real estate market.


This overlooks a few very important possibilities--a mistake I hope we can keep from duplicating.


First: The Treasury securities market is very likely in the midst of change. Its pattern of seeming to be on a slow, graceful roller coaster seems to be slipping. Instead, we're likely to see rates that continue to rise and bond values beginning to decline in a market that, as one of the most respected experts recently suggested, is at long last losing its tendency to bounce back every time a market force seems to change its direction.


As bond guru Bill Gross has been saying, "I think that the 35-year bull market in bonds and in stocks is ending. It probably ends, like T.S. Eliot said, with a whimper and not a bang." Another way of saying this is that the market corrections that we've grown accustomed to seeing for decades may surprise us--like the person who forgets to show up at his own birthday parties."


Second, then: If we're in the midst of subtle though major changes in our markets, it will pay us dividends to stay light on our feet--especially to refrain assuming that something is happening in the markets just because the markets for a moment look the way they did a couple of years ago.

Posted by Nick Rapplean on June 1st, 2015 3:35 PM

The National Association of Realtors last week announced that home prices in our nation had climbed by 7.4% during the year’s first quarter. This would seem to be reason enough to send a new army of investors in to purchase of real properties--but therein lies the rub. There just aren’t enough new properties on their way to completion, or existing properties for sale, to satisfy the pent-up demand for homes (mainly, affordable, entry-level properties) and as a result analysts are deeply concerned that the recent growth in selling prices and volume of sales could be undercut relatively soon by 1) a lack of homes for people to buy and by 2) a faster firming of prices for those homes that are available.


How much should we worry, and will the lack of housing inventory at the more affordable end of the market bring a quick end to this apparent jump in prices and sales? Perhaps concern, but not much worry, is appropriate here.


Mine is only one guess among many, but the data just multiplied within the last few days with a solid 1.7% rise in the Pending Home Sales Index for the month of December, and an 8.4% rise in the number of signed contracts over the year. The likelihood is much larger today that the real estate market will continue to firm for the time being.


There was also an exciting break-through report. As Bloomberg noted, "today's housing starts & permits report is one of the very strongest on record, with starts soaring 20.2 percent in April to a much higher-than-expected annual rate of 1.135 million and with permits up 10.1 percent to a much higher-than-expected 1.143 million.  The gain for starts is the best in 7-1/2 years with the gain in permits the best in 7 years."


Strength in starts is split between single-family, up 16.7 percent to 0.733 million, and multi-family, up 27.2 percent to 0.402 million. Single-family starts are up a very convincing 14.7 percent year-on-year with permits up only 0.5 percent."

Expectations are now much higher for building strength in housing, a sector held down badly in the first quarter by severe weather."


This is important stuff. Indeed, it could prove to be a long-awaited turning point for our real estate market--though the issue of prices rising faster than inflation and wages remains very real.


In any case, this may be the time to work up some partnerships with builders, as their sales begin to multiply and their need for appropriate financing becomes apparent. All in all, what we have here may be the best and most enduring news to reach us yet in 2015. It is probably also time to ramp up personal marketing efforts, so that lenders become more visible to potential borrowers as the need for assistance with financing grows.


And we may likely be seeing the healthy selling season this summer that many analysts had recently given up predicting. All in all, the news is remarkably good.

Posted in:Real Estate and tagged: Finance
Posted by Nick Rapplean on May 26th, 2015 3:10 PM

The economic indicators most relevant to the real estate market provided a small but mildly mind-boggling seminar last week in how not to get taken in by the data.


The week began well, with the important report on the number of sales of existing homes showing a convincing 6.1% rise in March over April's total. Bloomberg commented that this was the best rate to be achieved since September 2013.


It was tempting, of course, to take the evening off and raise some bubbly, confident that the real estate market might at long last be peeling its face off the ground. The proof of how sustainable this advance might be was, of course, not long in coming. The National Association of Realtors released its monthly pending sales index and, sure enough, which had slipped and stubbed its toe a couple of months before, was found to have risen by a strong 3.1%.


Okay, what does this mean to us? (Pardon me if what I say seems obvious, but it's important for us all to be on the same page here,)


The figure for existing home sales that is computed monthly by the National Association of Realtors gives us a decent idea of how many sales of existing--as opposed to newly-constructed homes--closed in a given month. That "closed" as in the deal is done, escrow closed, house keys handed to the new owners.


The number of pending home sales reported on by the National Association of Realtors, on the other hand, involves contracts for purchase. These are not home sales that have closed. They have recently opened and will turn into completed sales when the necessary financing has been arranged and other details of the escrow are handled. Until then, what we have is a probable sale, really--one that could fall out of escrow and sometimes does.


So when we talk about the increase in the number of sales of existing homes vis-a-vis the number of pending sales, you can see that we're talking about very different things and that we could easily confuse the dickens out of ourselves if we expect these two figures to mean the same thing. It really isn't correct, therefore, to say that the real estate market has improved greatly because, after all, pending and existing sales are both higher. In reality, the pending sales figure gives us rough information on the future, and the number of existing home sales tells us about the past. This is helpful to keep in mind.


Okay, but what happens when the new home sales figure is published and we, inevitably, compare it to the existing home sales figure. Well, in March, much to our consternation, new home sales plummeted in March, falling by 11.4% from the prior month. Importantly, though, if pending sales and existing sales are apples and oranges, new home sales are pineapples. They're just very different pieces of data.


Again the main difference--though the whole story is much more complex than this--has to do with time. Where pending home sales have just entered the closing process and existing home sales have completed the process, new home sales involve a baffling mix of processes in order to reach their conclusion. For one thing, the buyer of a new home often purchases a bit of dirt, a floor plan, a set of blueprints, a program for the building of the home. It could be several months before the home is finished and ready for occupancy, and this is very important. Why? Because the selling price and quantity of sales of new homes may seem to remain on the starting blocks quite a while after most existing homes have already run the race to the close of escrow. That means new homes are often slower to reflect the changes in the real estate market than are existing homes or, of course, pending sales.


Now, as I've said, there's really a lot more to it than this. New home sales data seem always to be much more volatile than existing home sales, which are done deals, far less subject to change.


And one of the big problems here is that most newspaper reporters who help to guide our understanding of how strong the real estate market is don't consider--in some cases, don't fully understand--the nuances of these different kinds of sales reports. And we end up thinking the sky is falling if new home sales are much gloomier than are existing home sales.


It may, therefore, still be a good time to get out the bubbly. All told, market data looks much better today than it did a couple of months ago and the markets aren't as worried that the Fed may begin to raise rates because it probably won't.


We're in a decent position for the time being, therefore.

Posted by Nick Rapplean on April 29th, 2015 5:27 PM

Consider a few events from recent economic history. Some time ago, when Ben Bernanke was still Chairman of the Federal Reserve, the Fed (as you doubtless recall) was busy buying about $85 million dollars' worth of Mortgage-backed securities each month. That kept the market for such securities very alive, you will recall, and was a very effective way of keeping interest rates quite low.

Now, while it was extremely enjoyable to have 30-year mortgage rates fall below 4%, the Fed felt the party had to come to an end at some point, so it announced that it would soon start to buy fewer securities and start the process of bringing an end to this program. This was not surprising news too anyone, but the stock markets fell dramatically, as if their sources of income had just been cut off.

The markets recovered, but they moved rather weakly, never managing to get convincingly higher--or lower, for that matter. We have been wandering along the economic path in apparent expectation of another shoe falling, it seems. But none really has. At least, not yet.

Once the new occupant, Janet Yellen, was installed as chairperson (formally referred to as Fed Chair), the next market-moving announcement was widely anticipated. With the end of the Fed's program of buying up Mortgage bonds concluded, investors anticipated that the Fed would start forcing shorter-term rates a bit higher, allowing them to reach the levels where they probably would have been all along without the Quantitative Easing program's effects.

In recent weeks, it became more and more obvious that the Fed planned to raise interest rates somewhat. It even seemed that the stock markets would find such a move relatively acceptable. But the Fed had a new problem--and it had a lot to do with real estate.

Specifically, the production numbers for real estate--the number of homes selling and being built--though they rose occasionally, generally remained in the doldrums especially new home construction. The real estate market, like it or not (and, frankly, I don't) just isn't performing very well. Those fabulously wealthy investors who bought up billions of dollars' worth of single family homes to rent and, someday, to sell, may be doing extremely well as rents and home values rise. But the overall market just can't gain lift-off for more than a few occasional seconds.

So the Fed is holding back its tapering of the program that keeps rates low. We’re more confused than we were before, frankly.

And here’s a remarkable example of the confusion. Yellen suggested that we'd know the Fed was seriously thinking about pushing rates higher when it removed the word, "patient," from its explanation that it would move slowly and with certainty to raise rates. At the last Federal Open Market Committee meeting, it did indeed remove those words, having backed itself into a corner it could not evade. But to remain somewhat true to itself, Yellen announced, "Just because we removed the word 'patient' from the statement doesn't mean we are going to be impatient."

It’s a fancy way, we suspect, of saying, "Oh, shut up," to critics complaining that rates should now be rising, but aren't. Such is the confusion facing our economy these days.

Posted in:General
Posted by Nick Rapplean on March 25th, 2015 12:39 PM

There's something that I'll probably never understand. Let me try to explain what I can about this mystery.

You will recall that the Federal Reserve reacted to dicey economic problems by erecting a quantitative easing program. In its third version, which ceased to exist in October of last year, the Fed was printing bushel baskets full of money, which were then spent on the purchase of mortgage-backed bonds.

The Fed created a big, unfailing market for those bonds in the process, and a surfeit of buyers for bonds meant the prices on those bonds remained quite low. Thus, the Fed supported low interest rates and, in the process, gave the real estate market a helping hand.

Now, when it first announced this program, a lot of people were deeply concerned about what it might do to the rate of inflation. After all, when we've talked worriedly in the past about inflation, one of the most damning phrases thrown out at the Fed was that it might be "Printing money."

"Money for nothing and your chicks for free" was, effectively a formula for rising inflation. We're talking about money that has no real anchor in the actual economy. Now, as--and if--that money were to be paid back to the Fed (and much has) that would constitute a classic inflationary event ostensibly. The Fed would truly receive money for nothing, which it could spend on most anything.

One of the things we quickly realize here is that the world economy--indeed, the national economy--is far from an airtight system. The Fed--and Congress--can mess with the numbers if it can argue it is helping the smooth fiscal running of our nation. (Anyone who disputes this is invited to read our Constitution but we'll save that discussion for another day.)

 Okay. Cutting to the chase here, at last, what we find is that the economic world expressed great angst when the Fed started to hint that it was about to deconstruct Quantitative Easing Part 3. Solemn articles were written that promised rising inflation and debilitating hikes to interest rates--hikes that could slow or even stop the growth of our economy.

None of this happened, as you doubtless know. In fact, the Fed slowed the QE program to a sliding stop and--what the?--interest rates actually fell.

Now, I find myself wondering as I approach sleep each night: Did the Fed do the right thing? Was its QE3 program a success? Did it stop the program in just the right way at just the right time?

If so--or if not--why didn't anyone write about it? Where are the op-ed pieces praising the QE3 for helping the economy avoid a decline?

I'm still looking for one--though that doesn't mean they don't exist. I just received an essay, written by David Stockman, arguing that we're right now beginning to suffer from the profligate printing of money in the recent past.

Personally, I'm not satisfied with that knee-jerk analysis. But I wish someone would deliver us a clear argument about whether the Fed succeeded with its unnerving save-the-economy programs, and exactly how that worked. I'm feeling like someone who's been watching the Super Bowl, and the game was abandoned because of technical problems, and I'm still wondering: Who, if anyone, won the game?

Posted in:Mortgage and tagged: Finance
Posted by Nick Rapplean on January 20th, 2015 4:51 PM

There is--and not just because of some terrorists in Paris--many causes for concern in our world today. And there's an irony here that we should note carefully. You've doubtless noticed that, for the past few months, stories kept popping up in the financial press asserting that the Fed might start to push interest rates higher sooner than we'd expected because of the strength of the American economy. But while investors worried about the onset of rising rates, our interest rates actually continued to decline. In fact, the yield on a 10-year Treasury note fell below 2% once again--a feat few analysts expected.


What made Treasury rates fall? It's relatively simple. Worried about European economies, which may be flirting with future recessions... and convinced that low oil prices will be with us for a long time, threatening the economies of several oil-producing nations (including Russia), many investors have moved their money to safe havens--like U.S. Treasury securities. Unsurprisingly, the cost of an ounce of gold, another safety zone for investors, has been rising.


The above-mentioned irony in all of this is that the European Central Bank is discussing the launch of a program in which it prints money with which to buy up government bonds. Sound familiar? It should. This is a complex version of our own Fed's quantitative easing program, which we recently concluded.


What makes it particularly complex is that, where the U.S. quantitative easing program bought mortgage-backed bonds from the U.S. government, a European version would have to somehow divvy up the purchases of bonds from various member-countries, somehow making the investments in those countries fair to all. Skepticism runs high, and so other alternatives are being examined.


Many economists, meanwhile, feel that the European Central Bank is simply acting too slowly. In the last quarter, the European economy grew at a rather weak 0.9% rate. During the same time, it grew by 5% in America. We should be watching Europe with great care, therefore.


A further irony, though, can be found in evidences of increased strength in the U.S. economy--including the real estate sector which, I believe, is extremely important to our hopes of a continuing recovery. As Gerard Baker, editor of the Wall Street Journal, said in Thursday's issue, "The U.S. economy has entered 2015 with the strongest momentum in at least a decade."


This view received a pointed confirmation Wednesday, when payroll processor ADP reported businesses had hired 241,000 workers in December. As the investment director at U.S. Bank Wealth management said, "The increase offered more evidence that the economy in the United States was on steady ground, and it gave investors another reason to jump back into the market after five consecutive days of losses."


This is fairly upbeat news greeting those of us who are finally emerging from the Holiday Season. It has pushed the yield on the 10-year Treasury back above 2%--though only by two basis points. But it leaves us wondering if the weakness abroad will successfully throw wet blankets on what appears to be growing strength in the U.S. economy.


Importantly, you can see that our economic strengths suggest a healthy real estate market. All the more reason to watch the European weakness, the American strength and, notably, the number of new homes being built. As Sherlock Holmes said to his partner, "The game is afoot, Watson!"



Posted by Nick Rapplean on January 12th, 2015 5:11 PM

Information received since the Federal Open Market Committee met in October suggests that economic activity is expanding at a moderate pace. Labor market conditions improved further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable.

Happy, happy, happy.  The Fed is feeling better and better about the economy.  They see employment getting better; people and businesses spending more; and inflation lower than expected (big ups to falling gas prices!).  They did fret a bit about the housing market which is slower than usual.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.

This is the, “we’re doing our job” paragraph.  The Fed tries to balance jobs and inflation.  Right now, the Fed thinks that balance is pretty even.  And the Fed assures us that they will, “monitor inflation development closely.”  What else did they think we’d think they were doing – monitoring the line on this week’s upcoming Lions/Bears game?!  (Although I do love the thought of them sitting around the big table at the Fed having a serious debate about whether Suh can get to Jay Cutler or not…

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

Here’s the “money” paragraph.  This is the one traders fast-forwarded to.  The Fed tells us here that they will keep short term rates low (they are basically 0% right now).  They tell us that they can “be patient” when it comes to raising short term rates.  They see inflation as being lower than their goal of 2% (they’d actually like to see prices rise a little believe it or not…)  But, they leave us with a warning – if new information about inflation comes in showing it’s rising faster than they expect – they won’t hesitate to slap interest rates in the hinie and push them higher.  (Public service announcement to mortgage bankers who think that mortgage rates will always be at 4.0% - when we least expect it – something will happen in the world or with the economy that will send rates shooting higher one day…)

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Remember all those trillions of dollars of mortgage bonds the Fed bought?  Well those bonds pay both principal and interest.  When the Fed gets the principal back (as you and I pay our mortgages down), they reinvest that principal.  The reason this is noteworthy is that that reinvested principal is actually a lot of money.  If they were to change this stance (and not reinvest the principal) that would have the effect of pushing mortgage rates higher.  So – way to go Fed – keep on reinvesting that principal!

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

This is where the Fed lets us know they aren’t insane and that they will act prudently when it comes time to shift their current stance of keeping rates low.  Whew…

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo.

Voting against the action were Richard W. Fisher, who believed that, while the Committee should be patient in beginning to normalize monetary policy, improvement in the U.S. economic performance since October has moved forward, further than the majority of the Committee envisions, the date when it will likely be appropriate to increase the federal funds rate; Narayana Kocherlakota, who believed that the Committee's decision, in the context of ongoing low inflation and falling market-based measures of longer-term inflation expectations, created undue downside risk to the credibility of the 2 percent inflation target; and Charles I. Plosser, who believed that the statement should not stress the importance of the passage of time as a key element of its forward guidance and, given the improvement in economic conditions, should not emphasize the consistency of the current forward guidance with previous statements.

All the nerds did NOT agree!  Richard Fisher, Narayana Kocherlakota and Chuckie Plosser both voted against the policy enacted by the Fed.  They disagreed for different reasons though.  It must have been a doozy of a meeting these past few days!

Posted in:Finance and tagged: Interest rates
Posted by Nick Rapplean on December 18th, 2014 2:19 PM

As you well know, the decline in the price of a barrel of crude oil is a boon to the American economy. For people like you and me, a lower price at the gasoline pump means we can fill our tanks and end up with more spending money afterward and, of course, we can drive to the mall or other shopping centers and spend that so-called disposable income on Holiday gifts. It costs most businesses less to do their business. And another way of putting that is: After all is said and done, most businesses get to keep more of their profits, since they don't have to spend as much on shipping and other fuel costs.


So if everything about lower oil prices is so wonderful, why did the Dow Jones Industrial Average lose 268.05 points on Wednesday? Clearly, someone isn't all that happy about lower oil prices. Why? For one thing, the oil firms, both the biggies like Exxon and the smaller companies that do the exploring and drilling, are losing money at the moment. Oil prices fell to a five-year low on Wednesday. It seems possible to be overjoyed at that news, but very few people are. Oil workers are facing layoffs, oil companies are cutting their spending, and there are a lot of long faces in the country's recently hot oil markets, in Texas, in the Midwest, and elsewhere.


Often overlooked in discussions is the worrisome reason behind oil's price decline. Quite simply, the world economy, not just the oil marketplace, is slowing. (One of the reasons, by the way, is that the U.S. has retrieved a leading share of the oil market, after years of weakened oil production. Learning to frack, to shake oil from rock, has proven to be immensely profitable.)


So the U.S. is no longer hungrily buying up as much of the world's oil production as it was for many years. And world economies, many of which are dependent on oil sales for their strength and health, are languishing.


Still, a lot of people are benefiting from the oil price declines and they're not all proverbial fat cats. As The Wall Street Journal asserted Thursday morning, Lower gas prices will benefit the poorest households, which spend more of their income on gas, and on rural drivers who travel longer distances. Looking at the whole American economy, Goldman Sachs believes the oil situation, which is expected to last for quite some time, could add $125 billion to the economy, not to mention the amount in advertising revenues spent to capture as much of the windfall as possible.


The economic web is far-reaching here. McDonald's, for example, is slicing its menu and changing the way its foods are made. The market share of the fast-food firm, as you know, has been plunging as quickly as have oil prices (no obvious relationship, of course, except that McDonald's, no doubt wisely, wants to become more of a restaurant and less a purveyor of toys and rather uninspiring menu choices. What this suggests, to me at least, is that the current battle for market share, whether between fast-food emporiums that need more than low prices and gimmicks to bring in clientele or between nations like the U.S. and Russia is a bad thing. Surely a little more spendable cash will benefit our economy at the end of the day.


And will it help our real estate market? Hard to see how it won't, from the decreased cost of driving clients out to see houses to the greater sense of personal wealth that people will feel as the low gas prices persist. Sounds, perhaps, like the basis for a more normal real estate market, with investors out wondering what to do with their bonds and where to put their investable money. Happy New Year, perhaps.

Posted in:Finance
Posted by Nick Rapplean on December 16th, 2014 4:22 PM


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