Fed Watch: Bernanke Getting Grilled
A: With his 2 day testimony to Congress finishing up today, I can tell you right now that fed chief Ben Bernanke is getting grilled as the members of the Committee of Banking, Housing, & Urban Affairs put Big Ben on the hotseat as the fed tries to strike a balance in monetary policy in a very uneasy environment of inflation pressures, geo-political tensions, and a cooling housing market and US economy.
The reason why equities markets rallied yesterday was a combination of being oversold over the past few weeks and Big Ben's comments to Congress where he declared: Should that moderation occur as anticipated, it should help to limit inflation pressures over time
This one statement was quickly interpreted by the trading markets to mean that we are very close to the end of the rate hikes as a cooling economy will by itself moderate inflation, and that another 1/4 point rate hike at August's meeting is now expected but not gauranteed! Fed funds futures are now at 70% or so in pricing in another 1/4 point rate hike at August's meeting, but dropped sharply in predicting any future rate hikes after that. Yields on the 2YR, 10YR, and 30YR bonds all dropped as well in addition to the US dollar's fall once this statement was released. Remember that bond yields and the US dollar rise as monetary policy is tightened making fixed assets more attractive and debt more expensive.
Very interesting as fed chief Bernanke and the other voting members of the FOMC are dealing with a very unstable environment and still dangerously high energy prices. I just dont see how all of this will come to resolve itself with a cooling US economy. Inflation is far more damaging than a future recession and Bernanke & Co. know this all too well. So why take chances?
The Skinny: Even if Bernanke pauses down the road, don't expect rate cuts to happen so fast. Big Ben even said that:
"The increase in energy prices is clearly making the economy worse off both in terms of real activity and in terms of inflation. There is no question about it," Bernanke told the House Financial Services Committee. Surging energy prices are acting like a double whammy on the country's economy, crimping growth even as they push up inflation.It's a tough world out there if your trying to time the real estate market and I'm doing my best to analyze where monetary policy is heading and how that affects the real estate market as a whole. In a nutshell: MONETARY POLICY IS LAGGING IN ITS EFFECTS AND AS LONG AS THE FED CONTINUES TO RAISE RATES AND BATTLE INFLATION, LENDING WILL BECOME MORE EXPENSIVE. AS LENDING BECOMES MORE EXPENSIVE, BUYERS WILL BE FACED WITH LESS AFFORDABILITY IN PURCHASING POWER AS THEY SEEK TO BUY A NEW HOME. AS BUYER DEMAND DAMPENS DUE TO MONEY BEING MORE EXPENSIVE TO BORROW, SELLERS WILL BE FACED WITH LONGER TIME ON MARKET AND FORCED TO REDUCE THEIR PRICE TO ATTRACT A BUYER.
Are you beginning to see why I talk about the fed and monetary policy so much here on UrbanDigs! Of all the great comments I get about the content of the site, I have received a few emails saying to stay away from fed talk. I disagree with this as I feel it is so important to monitor our new fed chief and how he reacts to environments such as the one we are in now, and especially pay attention to what rising interest rates ultimate affect on housing turns out to be! It will only help all of us invest more wisely in the future.
