It’s been an interesting week. Among the highlights, we’ve heard from both Ben Bernanke and Janet Yellen, and we’ve had a few Treasury auctions. The news from the Fed is unchanged…low rates for an extended period…recovery needs continued low rates to be sustainable…high unemployment…low inflation. To their credit the Fed is doing exactly what they said they would do…keeping rates low for a long time.
The first time we heard the phrase “…likely to warrant exceptionally low levels of the federal funds rate for some time” was in the December 2008 FOMC statement. They weren’t kidding then, and they don’t appear to be kidding now…15 months later. That infamous phrase was still being used in the March 2010 FOMC statement. It makes me wonder how long folks in Japan heard those types of statements as they waded further and further into their lost decade. At what point did everyone look around and say “hey we’ve got a real sticky problem here…nothing we are doing is working”?
They ain’t just sayin’ it…they’re Yellen it
Some quotes from Fed officials this week might add some color to what’s going on inside the Fed:
Janet Yellen recently stated:
- I don’t believe this is yet the time to be tightening monetary policy
- The economy will be operating well below its potential for several years,
- I don’t think we’re due for an outbreak of inflation, not in the short run, as a result of the Fed’s economic stimulus measures and not in the long run as a consequence of massive federal budget deficits
Here are a few from Bernanke this week:
- The economy continues to require the support of accommodative monetary policies
- …we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus
Regarding low fed funds rates, Chicago Federal Reserve Bank President Charles Evans said earlier this week:
- I would expect it will hold for the next three or four meetings, that’s about six months, I won’t be surprised if it carried into 2011
- On March 4th Evans said removal of accommodative policy is “still quite a ways away”
Other Fed officials such as St. Louis Fed President Bullard and New York Fed president William Dudley have also been in the news this month singing the same song as the others.
They are in no hurry to raise rates because there is no looming threat of inflation. Unemployment is still running north of 9.00% and the housing market continues to weigh on the economy like a fouled anchor. The problems that we face aren’t the type that go away quickly…nor do they lend themselves to bureaucratic “fixes”.
In the midst of a modest and fragile recovery I would expect them to continue telegraphing their thoughts on monetary policy long before any changes take place. At present they continue to state that “exceptionally low levels of the federal funds rate” are necessary.
Are they really done?
Another point to ponder is whether the Fed is REALLY done buying Treasury and MBS paper. Given the current state of the housing market the Fed has to be experiencing some real heartburn watching the last two Treasury auctions. The housing market is still in shambles and higher Treasury rates could begin pushing mortgage rates upward very soon. Will the Fed allow mortgage rates to rise 50bps, 100 bps? Or will they return to the market and take an even larger position to help keep rates low?
Auction time
The Treasury auctions commanded more attention than boring ole speeches by Fed officials. Yesterday’s 5-year auction was fairly weak by recent standards. That weakness spooked the market a bit and caused a decent selloff that continued late into the day. By the day’s end the 10-year was trading just over a 3.80%.
Today we had the 7-year auction. It was somewhat smaller in size than yesterday’s 5-year auction but this was a closely watched event. If we had more weakness at today’s auction it could spark a rout in Treasuries that could push yields to levels we haven’t seen in months. The 7-year auction turned out to be fairly weak as well and sparked another selloff in Treasury prices this afternoon.
The 10-yr Treasury is now trading at a 3.89%. That is the highest level at which it has traded since June 2009. As we head into the close for today we’re seeing that the pullback is reversing to a degree. The DOW was up over 100 points earlier today…at the close it is only up 5 points.
Tomorrow we get GDP, Personal Consumption, Core PCE, and University of Michigan Confidence.
What’s in it for me?
The upside of this activity is that yields are improving everywhere along the yield curve. Even if you’re a buyer of 2.5 year paper you’ll see some improvement in yields. If you’ve been waiting for a pullback, the market just gave you two in a row. You could buy a bunch of bonds tomorrow with better yields than you’ve seen in weeks and go into the weekend happy…and your broker could go into the weekend the same way.
No signs of improvement locally
Yesterday I noticed my neighbor was having some work done on her house. Being a good neighbor I walked over to inquire. While I was there I asked the contractor to stop by my place and give me a quote on some work I need done. He never showed. My neighbor told me that this was his last job. He’s been a contractor for 20 years, he’s seen good times and bad, but he’s never seen it like this. Two years after the recession started the economy is still so poor that this guy is having to fold.
Last month I was talking with a friend of mine who owns a speed shop here in town. He and I get along pretty well despite the fact that he was in the Navy and I was in the Marines. He does performance work on Mustangs and Corvettes. He’s worried that his business might not make it through this recession. People have absolutely quit spending money on luxury items like nitrous kits for their sports cars. He said he used to have to close the doors an hour early every day because he couldn’t fit any more cars in the garage…he pointed to the 3 cars in a garage that can hold up to 10 and said “this is all I’ve had all day.”
Lastly, I spoke with a bunch of car dealers this month. One of them is the highest volume Ford dealership in the region. They say sales are up over the last month or so but using the numbers they gave me in my informal survey, sales are still about 30% off the old “pre-recession” numbers…and they are having to offer huge incentives just to get to that level.
The trend in the national economic data combined with anecdotal evidence from my local economy tell me that we are a long ways away from returning to a normal unemployment rate of 4.5%.
If you have any questions on this material or if there is anything I can be doing for you just let me know.
Steve Scaramastro, SVP
800-311-0707
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