The Home Buyer's Korner

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April 9th, 2015

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Federal Fed Statement for April 2015

Janet Yellen

The Fed was reported to be divided at its March policy meeting on whether to raise short-term interest rates in June with soft economic data coming in recently. Inflation has been running below the Fed’s target two percent objective for almost three years with low fuel cost reaching their target rate appears slim. Any sanctions being removed on Iran in the near future could flood the world with even more oil and further reduce any inflationary pressure, coupled with a strong U.S. dollar, which lowers the cost of imported goods.

Some officials think June is the right time to raise rates, but those members are closely aligned with Wall Street and not Main Street while other think it would be better to wait longer. There has even been some talk about a 2016 date, but no names were released in the minutes as to who said what.

A real division appears to be on the horizon for Fed Chairwoman Janet Yellen in the months ahead. In the March meeting, she received a unanimous vote to drop language in the Fed’s policy statement that the central bank would be “patient” before raising rates. Single words in the Fed Statement are close watched and the change opened the door to rate increases by midyear, but at the time a lot of pressure was being put on the Fed by Wall Street as they were pointing to the robust uptick in the U.S economy during the fourth quarter. Since then we’ve seen a much less robust improvement and sign Main Street is still isn’t feeling any real improvement although Wall Street is doing just fine.

Since the March meeting, disappointing data have suggested the economy slowed in early 2015. Just last Friday, the U.S. Labor Department reported that hiring was down significantly in March. The Fed has held its benchmark short-term interest rate near zero since December 2008 to support economic growth and hiring, but said in March that it would start raising the rate when it has seen improvement in the labor market and reasonably confident inflation will rise to its two percent target. With the most recent data in, neither of those two factors appear to be on the horizon and could be trumping any pressure Wall Street is exhorting on the Fed to increase cost on Main Street.

Those of us who live on Main Street have been expressing a variety of concerns about the economic outlook even before the latest data came in. One that should concern us all is the impact of a strong dollar, which often curbs exports and slows jobs growth.

Fed officials don’t like to discuss the strength of the U.S. currency, which is seen as the domain of the U.S. Treasury, but in recent weeks they have commented on the likely impact of the dollar’s 20 percent +/- rise in just the past year and it’s beginning to look like the 800 lbs. gorilla in the room. An increase in short-term rates are designed to curb any economic overheating and the dollars increase acts much in the same way by creating slower growth and lower inflation. Several Fed members noted in the minutes that the dollar’s further appreciation over the inter-meeting period was likely to restrain U.S. net exports and economic growth for a time.

Officials at the meeting mentioned that other nations and their central banks have taken measures aimed at stimulating growth and spurring inflation and could lead to a further appreciation of the dollar, but another noted that such actions had also strengthened the outlook for growth abroad, which would bolster U.S. exports. In short, our leaders sailing in unchartered waters and waiting to see what the European Union, China and Japan does next before making any strong move and that probably isn’t a bad thing. Fed staff economists also revised down their estimates of economic growth, pointing to the effects of the strong currency and that probably means we’ll continue to see mortgage rate under 4 percent as we move into the spring and even summer home buying season.

On the release of the Fed minutes the dollar weakened and yields on 10-year Treasury notes fell. Fed governor Jerome Powell struck a cautious tone in a speech this week pointing to the experiences of other central banks. He noted there is a risk that the Fed could raise rates too much too soon and weakening our economy, which would be likely if they choose to listen to Wall Street and disregard everyday lives on Main Street.

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