The Federal government reaction to the Covid outbreak in early 2020 included massive monetary stimulus, Federal government spendathons and Biden’s green energy policies have resulted in a sizzling 8.5% inflation rate (update on Monday morning).
The problem is that The Federal Reserve is far behind the inflation curve with their target rate at only 2.5%. And The Fed’s balance sheet remains near $9 TRILLION in assets held.
In Euroland, we are seeing a similar problem (Frankfurt, we have a problem!). The Eurozone inflation rate is at 9.1% while their version of The Fed Funds Target rate is only 0.75%, a large catch-up gap.
If we look at the Taylor Rule for the US using headline inflation, we see that The Fed needs to raise their target rate to … 21.72% to crush inflation.
In Euroland, the problem is similar. At 9.10% inflation, the ECB will have to raise their version of The Fed’s target rate to 16.80% to combat inflation. As if that will happen in either the US or Euroland.
On a different note, is it my imagination or does US Democrat Senate candidate from Pennsylvania John Fetterman look like the alien from the flick “Battleship”?
The US housing market is facing stress thanks to The Federal Reserve’s “war on inflation.” As The Fed starts trimming its excess ballast and M2 Money growth YoY slows to the lowest since Pre-Covid, we are seeing housing markets like San Francisco beginning to experience declines in home prices.
According to Redfin, Oakland California is leading the nation in terms of declining sales prices at -15.1% over a 3 month period. Followed by Silicon Valley and San Jose at -12.7%. San Francisco is in third place at -11.2% (I will ignore Lake Havasu AZ since it is teeny but does have one of the London Bridges) and Austin TX is in 5th place at -9.7%.
The monetary noose tightens on the housing and mortgage markets.
Mortgage applications decreased 0.8 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 2, 2022. They are now the lowest since 1999.
The Refinance Index decreased 1 percent from the previous week and was 83 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. The unadjusted Purchase Index decreased 3 percent compared with the previous week and was23 percent lower than the same week one year ago.
At least the percentage of adjustable rate mortgages (ARMs) remained the same at 8.5%.
For the sake of the housing and mortgage market, somebody stop Powell and The Gang from tightening!
Thanks to Federal Reserve increases in their target rate, the 30-year mortgage rate has risen above 6%.
What drives me crazy about The Fed is their failure to removed monetary stimulus following the financial crisis of 2008 when they dropped their target rate to 25 basis points (0.25%) and began assets purchases (orange line). The Fed raises their target rate only once during Obama’s Presidency but then raised rates 8 times after Trump was elected President.
Now we are seeing The Fed NOT shrinking their balance sheet in a meaningful way. However M2 Money growth YoY (green line) has slowed to 5.2%.
While it is a good thing that The Fed is FINALLY reducing some of the monetary stimulus in place since 2008, the bad thing is that mortgage rates are rising rapidly.
The Fed’s quantheads are predicted to resume easing in March 2023.
The August jobs report is out. 315k jobs were added, which was considerably higher than the ADP jobs added report of 132k. Hmm.
Be that as it may, US Average Hourly Earnings YoY remained at 5.2%. That’s a shame since the last inflation report had US inflation at 8.5%. That translates to REAL Average Hourly Earnings YoY of … -3.3%.
Labor force participation rose to 62.4%.
This is a decent jobs report and will likely lead The Fed to continue raising rates, particularly when The Fed sees that multiple jobholders has increased to cope with inflation.
When we look at tomorrow’s US jobs report, it is important to acknowledge that 1) The Federal Reserve has not yet removed the Covid stimulus (green line) and 2) the ADP payroll jobs added was only 132k in August while non-farm payrolls jobs added in July was 528k. That is quite a spread!
(Bloomberg)The hotly anticipated US jobs report has the potential to tip the scales toward a third jumbo-sized hike in interest rates later this month after a wave of data that point to a resilient consumer and high labor demand.
Friday’s report is one of the last marquee releases Fed officials will have in hand before the mid-September policy meeting to help them decipher a complex economic and inflationary puzzle.
Forecasts call for a healthy, yet more moderate 298,000 gain in August payrolls and for the unemployment rate to hold steady at 3.5%, matching the lowest in five decades. Solid wage growth is also expected amid a persistent mismatch between labor demand and supply.
Such figures, in conjunction with a blowout July employment print, improving consumer sentiment figures and a surprise pickup in job openings, could be enough to push the Fed to raise borrowing costs by 75 basis points, extending the steepest interest-rate hikes in a generation to curb an inflation surge.
As of this morning, Fed Funds futures data is still pointing to The Fed Funds Target rate rising from 2.50% to around 4% by the March FOMC meeting. That is still a large jump of another 150 basis points anticipated.
When inflation is so bad that REAL wage growth is negative (-3.31% YoY), I would hardly call that a strong economy for the middle class and low-wage workers.
We also see that REAL home price growth (existing home sales median price YoY – CPI YoY) has slowed to only 2.23% YoY in July.
As The Fed tightens, it is only growing to get worse.
The ADP National Employment Report SA Private Nonfarm Level Change printed this morning confirming what most of us already knew … the US economy is slowing if not already in recession.
The ADP jobs added grew by only 132k in August as The Fed’s M2 Money growth slowed.
Since The Federal Reserve and Federal government overstimulated the economy when Covid surfaced in early 2020, The Fed’s balance sheet expanded to near $9 TRILLION which helped existing home sales median price YoY hit 25.2% in May 2021 but falling to 10.8% YoY in July 2022 as The Fed tightened rates.
It will be a monetary inferno if The Fed decides to actually unwind its $9 trillion balance sheet.
Mortgage application volume dropped and remained at a multi-decade low last week(back to 1997), led by an 8 percent decline in refinance applications, which now make up only 30 percent of all applications. Purchase applications have declined in eight of the last nine weeks, as demand continues to shrink due to higher rates and a weaker economic outlook.
Mortgage applications decreased 3.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 26, 2022.
The unadjusted Purchase Index decreased 4 percent compared with the previous week and was23 percent lower than the same week one year ago.
The Refinance Index decreased 8 percent from the previous week and was 83 percent lower than the same week one year ago.
Just wait for The Federal Reserve to start unwinding its enormous balance sheet!
Confounded Interest - Anthony B. Sanders 
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