Monetary balancing act trickier than expected
A coulda-been-worse inflation report Friday gave us a morning-only breather, rates rising again now, as they will continue to do.
Bonds and mortgages on Wednesday broke through crucial levels: the 10-year T-note through 4.42 percent to 4.49 percent (higher Friday), lowest-fee mortgages through 6 percent to 6.125 percent (a move which Freddie Mac's survey won't "discover" until later this week).
The overall September Consumer Price Index rose 1.2 percent, the largest single-month gain in 14 years, now a 4.7 percent year-over-year increase. However, the "core" rate, excluding volatile food and energy prices, rose only .1 percent – just 2 percent YOY, down from 2.4 percent YOY in July.
Some have misunderstood the Fed, seeing it in a jawbone offensive against inflation, but not intending to raise its rate much farther because core inflation is under some control. Many others have mistakenly assumed that high energy prices would do the Fed's work, slowing the economy. Give that up: September retail sales rose 1.1 percent excluding the collapse in SUV sales, and despite Katrina/Rita. There is some word of accumulating inventory of homes for sale, but no decline in aggregate sales, nor a decline in purchase mortgage applications.
Bonds and mortgages have not adjusted to the very great likelihood that the Fed will go .25 percent at each of the next three months' meetings, putting Fed funds at 4.5 percent by Feb. 1. At that point, a lot of heavy lifting will have been done for the new Chairman (hope – pray – for Ben Bernanke or Donald Kohn), but any new Chairman faces market doubt about toughness, and the only way to demonstrate fortitude is to raise rates. Any flinch by the new Chairman will be interpreted as timidity, or execution of election-year instructions from the White House.
Read the entire Lou Barnes Inman News article