Wednesday, October 14, 2015

Potentially good monetary news

There have been some dovish signals the last few days from Fed officials.  This could be great news.  It would have been even more effective to signal more dovish intentions long ago, and to pull back when necessary.  Instead they have tended to be hawkish before shifting to dovish positions as the consequences of their hawkish stance have become apparent.  This is certainly a lot better than being hawkish and remaining so, in light of the evidence.  And it may be the best we can expect, given so many hawkish views among traders, economists, and the broader public.

Bond markets seem to be reacting as I would expect, with short term rates falling and long term rates holding firm.  I would expect some positive response from equities, which isn't apparent today.

This sort of context is where I see potential trading gains among homebuilders, because the idea that home values and housing expansion is a product of mortgage rates and the demand that low rates encourage is highly overestimated, in my opinion.  The growth in housing will come from general monetary expansion, including more non-credit demand and the continuing accumulation of positive home equity.  Mortgage availability is a constraint, but that constraint has little to do with rates or demand.  This may cause bullishness among homebuilders to be less forward-looking than it should be.

If the Fed can sit on their hands for just a little while, and natural rates can get above the target rate, we might be able to get a regime shift where the status quo would be accommodative instead of constraining,  where the Fed could be seen as hawkish by following natural rates up, when in fact they might be neutral or dovish.  That would be a welcomed change of pace.


  1. I hope the Fed in fact eases up. But I think even at this point points to quantitative easing. And the Fed seems loath to move to QE.


    1. These are interesting times, aren't they? So many potentially negative and potentially positive developments. I'm afraid that means we still have a few large mistakes to make and that we are basically sitting on the cusp of 1937.

      I was pleased to read David Glasner's post today about how communications from the Fed seem to reflect an Austrian Business Cycle framework. I think they can be parsed a little bit to salvage a different interpretation. (For instance, in his post, Bernanke is clearly distinguishing between corporate rates and treasury rates.) But, in the communication to a mass audience, these distinctions can get lost, and as you know, QEs were associated with rising treasury rates, not falling rates, anyway.

      So, we are at this strange place in time where there are strong populist sentiments among both right wing gold bugs and left wing progressives that basically use an Austrian BC framework, and Fed communications feed these sentiments. This all filters through an incoherent set of conspiracy theories and empirically errant ideas about debt, interest rates, and asset values, to create a widely accepted policy stance, that is effectively a stance against functional growth.

      There are a lot of odd bedfellows lining up to create this strange context, aren't there?