The Fed’s current monetary stimulus has helped fuel powerful rallies in the stock and credit markets as well as light a fire beneath the housing market.
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What is truly different now from the dot-com bubble era is the current monetary backdrop. Then, the Federal Reserve was steadily tightening its policy, in contrast to today’s super-accommodative stance with short-term rates pegged at near zero percent and the central bank pumping $120 billion per month into the financial system with its securities purchases.
Starting in mid-1999, the Fed, then chaired by Alan Greenspan, steadily raised the federal-funds rate, from around 4.75% straight through the peak and plunge in the stock market in early 2000, to 6.5% by that August. In effect, the Fed was undoing 1998 rate cuts made in reaction to the Russian ruble crisis and ensuing collapse of Long-Term Capital Management that roiled financial markets, further solidifying the notion of a Fed put that would rescue markets when they got into trouble.
The Fed’s current monetary stimulus, along with fiscal relief from the $2 trillion-plus Cares Act and other federal measures, has helped fuel powerful rallies in the stock and credit markets as well as light a fire beneath the housing market. The effects have been electric for household wealth, which jumped by $3.8 trillion in the third quarter to a record $123.52 trillion, according to new Fed data published this past week.
With the stock market rally led by the megacap tech names, households’ equity wealth jumped by $2.8 trillion in the latest quarter. Their residential real estate net worth also rose by $30 billion, driven by the rapid rise in house prices amid the widely reported flight to single-family homes in the suburbs for more space than apartments in cities under lockdown.
That surge in home buying also was spurred by record-low home-mortgage interest rates, down to 2.71%, according to the latest data from Freddie Mac, from 3.73% a year earlier. Offsetting the lower rates, the Case-Shiller national price index showed that home prices rose 7% in the 12 months through September, up from the 5.8% year-over-year rate in August and the fastest pace since May 2014.
That means housing affordability has worsened for prospective buyers. Which prompts Peter Boockvar, the chief investment officer at Bleakley Advisory Group, to wonder why the Fed is still buying $40 billion per month in agency mortgage-backed securities. “Are 7% annual price increases not fast enough, especially for the young, first-time buyers with the least amount of means?” he rhetorically asked in a client note on Wednesday.
Moreover, by owning more than one-third of the market, Boockvar says the Fed is “in the process of Japanifying the MBS market.” (The Bank of Japan so dominates that nation’s debt market that relatively few actual bonds change hands there.)
Its asset purchase plans should be the biggest news to come out of this coming week’s meeting of the Federal Open Market Committee. But don’t look for the Fed to change its practices anytime soon.
J.P. Morgan Chief U.S. Economist Michael Feroli thinks the FOMC could provide “qualitative outcome-based guidance” (dubbed QOG by Fed watchers) about how long it will continue the current pace of securities buying. “A reasonable evolution of the statement language would predicate purchases on the course of the public-health crisis,” he writes in a research note.
Some Fed watchers think the central bank could begin to tilt its $80 billion monthly Treasury purchases toward lengthier maturities to help cap longer-term interest rates. But the overall size of the purchases isn’t likely to be increased. Neither do market participants look for them to be reined in before the end of next year, Feroli adds. But providing guidance about future purchases could spark a taper tantrum, a reference to the sharp negative market reaction in 2013 when the Fed indicated it would slow its bond purchases.
The Fed surely wouldn’t want to do anything to disturb things while Congress continues to fail to agree on a much-needed new fiscal relief bill. That’s especially true given the worrying signs of deterioration in the labor market, highlighted by the sharp 137,000 jump in unemployment claims, to 853,000, in the latest week.
Soaring coronavirus cases are forcing new shutdowns, including on indoor dining in New York City starting on Monday. Open Table data suggests food-service employment could plunge by 500,000 in December, which could weigh on overall nonfarm payrolls, Nomura economists write in a client note. Even with the impending approval of Pfizer’s (PFE) coronavirus vaccine and stocks hovering near highs, we may still face a winter of our discontent.
Read more Up and Down Wall Street: From Airbnb to Tesla, It’s Starting to Feel Like 1999 All Over Again. It May End the Same Way.
Write to Randall W. Forsyth at [email protected]
