|
If the Fed’s reason for the current rate increase cycle is to fight inflation, then its integrity should come into question. Inflation is caused by the increase of money supply. The Fed’s most likely intent therefore is to cool off the housing market while keeping the rest of the financial economy inflated. If that were the case, then the Fed’s NOT succeeding in either. On the housing market, according to the weekly data released by the MBA (Mortgage Bankers Association), the Purchase Loan Application Volume uptrend that started in 2000 exhibits no signs of slowing down (Chart 1). If anything, it seemed to have picked up the pace recently (black arrow).
The Fed may be able to dictate its fund’s rate and its discount rate, but it has little influence on the bond yields and, therefore, the long-term mortgage interest rates. The bond yields are dictated by the force of the bond market. According to MBA, as of 8/5/2005, the 30-year fixed rate was at about the same level as a year ago, notwithstanding the Fed’s 10 consecutive rate increases over the past 14 months (Chart 2).
If anything, the Fed’s rate hike only slows down the ARM’s (Adjustable Rate Mortgage) application. According to the MBA, ARM share of the total mortgage volume has declined to under 30%, from the March 2005 high of 36.60%, and that too is at about the same level as January a year ago - see Chart 3 below.
What the Fed didn’t succeed in slowing down home buying, it succeeded in slowing down buying everything else on credit. The rise of the prime lending rate is making buying everything else on credit more costly. The consequence, unintended or otherwise, is reflected in the declining monthly consumer goods imports. In the End User category of the International Trade report released on Friday, June’s imports of consumer goods increased only $0.15 billion from May. It was the slowest in three months. Incidentally, the $3.4 billion decline in March was by far the steepest.
As I’ve stated in the past, we don’t need intricate economic models or formula in order to see where our economy is headed. All we have to do is keep our eye on the consumption, which represents 70% of our economy. And, the sector that’s directly affected by the change of consumption is, by all means, the retail. Chart 5 shows that the S&P Retail Index appears to be ready to return to the equilibrium after feasting on the Fed’s post London bombing liquidity for about a month. The index is currently hanging right at the 465 support line, which used to be the resistance back in November and December. And, that seemed to be an unbreakable resistance then; the market couldn't even overcome this resistance with all its post presidential election momentum.
The retail sector plays a vital role in the overall market performance (see my July 3 Sunday Chartmentary). When the retail sector falls below this support, it's going to bring the market down with it. If the Fed's intent was to crash the stock market and drive our economy into a recession, then things seem to be moving in the right direction. However, if the Fed's intent was to fight inflation and cool off the housing market, then the Fed's failing, miserably.
CONTACT
INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
