_Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related images(s)._
[Click here for full graphic [WSJ]](http://interactive.wsj.com/documents/info-fedparse0608.html).
_Inspired by Greenspanspeak, and transitioning to Bernankespeak, the Wall Street Journal continues a well-executed tradition of graphically interpreting what the Fed really means._
[The official press release [FOMC]](http://www.federalreserve.gov/boarddocs/press/monetary/2006/20060808/default.htm)There have been some inflationary signs recently with rising energy costs, concerns about supply and core inflation has risen as well (inflation without food and energy). However, the fed indicated that these will work themselves out and did not raise rates. The first time the fed has paused after 17 consecutive 25 basis point increases since June 2004.
Basically, their observation on housing was consistent with June but the overall economy has essentially changed. I’d venture to guess that the economy changed because housing kept doing what its been doing over the past 2 months and was the primary catalyst for the economic change. Its interesting because the fed seems to be saying from their position that housing didn’t deteriorate further since they used the exact same language in the statement (see bold).
August Statement
>Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.
June Statement
>Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.
With the state of the nation’s housing, it is sure looking like rate cuts in 2007.
_June Statement Analysis_[FOMC Makes It 17 at 5.25% And Seems to Get It About Housing [Matrix]](http://matrix.millersamuelv2.wpenginepowered.com/?p=723)
_Why this might mean the end of rate increases for a while_[Why a Pause in Rate Cycle Is Apt to Be the End: Caroline Baum [Bloomberg]](http://www.bloomberg.com/apps/news?pid=20601039&sid=a3AwBjq..qJg&refer=columnist_baum)
4 Comments
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When housing prices were going through the roof, the FED kept interest rates low, based on the fact that “inflation,” which uses rents as the basis of housing costs, was low.
Greenspan and then Bernanke made the case that the FED should focus on inflation, not asset prices (like the price of owner-occupied housing).
How that housing prices are softening, but rents are rising, it appears the measure of inflation is shifting to the former.
Bottom line: policy is inflationary.
Governments, households, and (if you include pension liabilities) businesses are deep in more debt than they can service. Those debts cannot be paid in today’s dollars. The options are a reduction in the value of the dollar, which is to say inflation, or mass default. The hope appears to be that inflation will bring nominal income up to the level required to support today’s housing prices and credit card debts.
The problem: lots of the debt is variable rate. But someone seems willing to lend for 30 years for no more than the return on cash. Amazing.
“With the state of the nation’s housing, it is sure looking like rate cuts in 2007”
And that’s a shame – allowing for inflation and a weakening dollar just to rescue those who got into real estate over their heads. I’m not certain why anyone should feel responsible for their behavior anymore, if the government is just going to come in and clean up their messes for them.
However, that was a good post about psychology – maybe there’s nothing that can save housing, if it becomes a matter of psychology.
Im not so sure rates will be cut in 2007. 2007 will be the year that $70+ oil prices effects are felt via inflation pressure.
Just because the fed is pausing, doesnt mean they wont raise again. The definately will NOT raise next meeting, or meeting after just to save their image (and to avoid looking like they made a mistake).
But raising again by years end is certainly a possibility. Housing slowdowns take time to play out, Im talking years not months. Plus, we still havent seen the total effects of monetary policy yet. So, maybe the fed did do the right thing with a pause, but there primary concer is pricing stability, fight inflation, and support the dollar. All of which will lead me to think that rate cuts are further away than people think.
Lets NOT forget: The fed PAUSED ONLY because they predict the cooling economy will subdue inflation pressures! If the economy does cool, than its what the fed wants! Why would they start cutting right away?
I think the point here is that housing, from the fed’s perspective, seems to be the constant right now and the economy is the variable. I think the economy will continue to weaken as the full brunt of the rate increases have not yet hit. I think this is could be the beginning of a weak period, if not eventual recession. I am thinking rate reduction at some point in ’07 to keep the economy from stalling. The feed seems to think that energy will work itself out and not be hyper inflationary, after all, energy futures tend to be over reactive immediately following bad news (like the BP pipeline situation.