Independent Fed and Housing Optimism - October 16, 2018
“Going Loco” and Past Precedent
Over the last week, markets have wobbled. Bond yields broke to multi-year highs as the VIX spiked and equities dropped, with some indexes seeing the largest one-day percentage drops since 2011. Cue the mudslinging and finger pointing. As many business networks scrambled to explain the moves, President Trump had a clear explanation - the occupants of the Eccles Building. “The Fed is going wild. They’re raising interest rates and it’s ridiculous,” he said to Fox News. That followed an earlier statement, “They’re so tight. I think the Fed has gone crazy.” In response, Janet Yellen said yesterday at the Mortgage Bankers Association annual meeting that, as far as the President’s comments are concerned, “There’s no law against that... but I don’t think it’s wise”.
All rumors aside, there is some precedent for treading carefully around the subject of politicization of the Fed. Going all the way back to the St. Louis Fed’s 2005 March/April Review, Allan Meltzer’s “Origins of the Great Inflation” chronicles the push and pull between the Fed and various administrations during the Great Inflation from the mid-1960s to mid-1980s. Though ostensibly seeking to analyze why the Great Inflation started and continued, it “gives a large role to political decision making”, asking “How could they fail to see (or learn) that their actions were inadequate to slow or stop inflation?” In chronicling the events, mistakes, and corrections that lead to massive moves in CPI and unemployment, Meltzer points out the very real human and political pressures that complicated the decision making. While on the longer side, Meltzer’s analysis provides an excellent historical account and is worth a (weekend) read.
While the equity and bond markets may have been faltering, news from the housing sector continues to be positive. Though mortgage rates “are now at their highest level since the week of April 14, 2011”, according to Freddie Mac’s Primary Mortgage Market Survey, the NAHB Housing Market Index beat analyst estimates and rose to 68, one point above last months reading. Robert Dietz wrote in an article for the NAHB’s Eye on Housing blog, “Builders continue to view solid housing demand, fueled by a growing economy and a nearly 50-year low for unemployment. Lumber price declines for three straight months... have also helped reduce some cost pressures, but builders will need to manage supply side costs to keep home prices affordable.” This may prove to be an issue according to “Unfilled Construction Sector Jobs Continue to Rise”, another article by Dietz. Both the number of jobs and open position rate in the construction sector hit post-recession highs as “access to labor remains a top business challenge for builders”. With storm repair activity expected to increase demand for construction workers, this tightness is not likely to improve any time soon and we will see if it translates into higher construction wage or increased capex as companies seek to hire more workers or do without.