Yes, No, Maybe So

No one expected this month's Federal Open Market Committee meeting to result in higher interest rates, which is the monetary policy question of the moment, and indeed that's what happened.

No one expected this month’s Federal Open Market Committee meeting to result in higher interest rates, which is the monetary policy question of the moment, and indeed that’s what happened. Also as usual, there’s no information about when the uptick will happen, at least that the central bank is willing to share. As usual, pundits and other observers parsed the statement issued by the FOMC after its meeting — which ended on Wednesday — and likewise didn’t come to a consensus about rates. Yes, it will be September, according to some; no, it will wait to December, posit others; maybe September, maybe December, adnit yet others. The whole thing would be comedy of manners (central banker manners) if it weren’t so important for the course of lending, including real estate lending.

In its statement, the Fed talked about the importance of a strong jobs market, which the economy finally seems to have found. It also talked about how inflation is too low. The magic inflation number for the Fed is 2 percent, and the CPI hasn’t quite managed to hit that number in recent quarters, and wholesale prices haven’t been quite up to snuff either. “Inflation continued to run below the committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports,” the statement noted. “Market-based measures of inflation compensation remain low; survey‑based measures of longer-term inflation expectations have remained stable.” To sum up the FOMC’s lately position: no change for now, no hints on when that will be.

In other news, the residential side of the industrial — something the Fed notes in its reports, but not as important in decision-making as employment or inflation — continues to simmer along at a non-crazy pace, which is good news. (It was only 10 years ago, after all, that the bubble was expanding in its harmful way.) The latest Case-Shiller numbers point to growth in home values, but not a bubble-like growth. The company said this week that its National Home Price Index, which covers all nine U.S. census divisions, recorded a 4.4 percent annualized increase in May 2015, about the same as the 4.3 percent increase in April — the stuff of modest appreciation. The National Index, according to Case-Shiller, is 7.6 percent below the bubble peak, but in real terms, the index is still about 21 percent below the bubble peak.

Also, the National Assocation of Realtor’s Pending Home Sales Index, which is a forward-looking indicator based on contract signings, fell to 110.3 in June in an unexpected drop. That could be a monthly anomaly, since the number of pending sales has been going up for most of this year (seasonally adjusted, so it isn’t because people get out and buy houses in the spring), and the index is still higher than in June 2014 (101.9). Or the drop could point to a squeezing in the residential market because of two factors. One is that inventories are relatively low. In many markets, there simply aren’t as many houses for sale as “normal” in historic terms. Also, even “modest” appreciation on average masks larger gains in some markets that are locking a lot of buyers out (such as in Denver or Seattle).