You remember when Greenspan has said in his book that Fed in effect has lost control over the long term rates? I wonder if some of the most recent developments in the credit market confirm his point of view. Consider this- Fed cut rates 125BP in the month of January and jumbo mortgage rates went up?
"Companies are paying more to borrow now than before the Fed reduced its benchmark rate by 1.25 percentage point over nine days in January, based on data compiled by Merrill Lynch & Co. Rates on so-called jumbo mortgages, those above $417,000, have increased in the past month, making it tougher to sell properties and risking further price declines" Bloomberg reported
It seems that even Fed governors are acknowledging that their cuts did not make the intended impact due to the tightening loan standards, rising inflation expectations and continued declines in the value of the underlying collateral.
``The increase in credit spreads has sort of worked against our policy,'' San Francisco Fed President Janet Yellen told reporters at her bank yesterday. ``The fact that the spreads went up so dramatically really resulted in an effective tightening of financial conditions that our cuts were partly meant to address.''
I am bit surprised by a solution that is presented as the logical solution though? - cutting rates even lower... If you someone still believes that Fed isn't blowing up any new bubbles read this article from WSJ
"A typical mortgage here -- which is pegged to the prime rate which, in turn, is tied to the base rate -- now carries interest of about 3.1%. But compared with Hong Kong's inflation rate of about 3.8%, which is hovering at a more-than-nine-year high, that looks especially inviting, creating a so-called negative real interest rate...Andrew Fung, head of investment and insurance for Hang Seng Bank in Hong Kong, calls the property market here one of two "certain investments" -- along with the appreciation of China's currency, the yuan -- in an uncertain economic environment. Underlying the property-buying enthusiasm: fast-rising wage increases, unemployment near its record low and bank deposits growing at about 20% a year."
Any time some says a word "certain investment" I think it's about time to head for exits...
