The release of the minutes for the Federal Reserve's last policy meeting caused a lot of churn in financial markets, especially in currencies. I read contradicting headlines with one interpreting the minutes as confirming the Fed will taper in September and another headline insisting that there remains much disagreement about the timing of tapering. Given the headline churn, I decided to read these minutes for myself. I concluded that it is not safe to conclude we learned anything new about the Fed's timeline for tapering. Various comments coming out the Jackson Hole confab further confirmed this conclusion.
Steve Liesman from CNBC interviewed several Fed presidents on the issue of tapering. I watched the snippets on Nightly Business Report. Dennis Lockhart from Atlanta and John Williams from San Francisco seemed to suggest it is "full steam ahead" on tapering as soon as September. They each conditioned their statements on the economic data continuing along its current path. James Bullard from St. Louis was much more cautious, insisting that there is no hurry to do anything given the low inflation numbers and "mixed data on the economy." Moreover, Stanford University economist Robert Hall presented a paper cautioning the Federal Reserve away from exiting stimulative policies too early.
The bottom-line remains we just have to see what happens. In the meantime, the references in the minutes on the housing market really caught my eye. Here are the related passages from the minutes and my editorial and commentary:
"The recent rise in mortgage rates did not yet appear to have had an adverse effect on housing activity…
…While recent mortgage rate increases might serve to restrain housing activity, several participants expressed confidence that the housing recovery would be resilient in the face of the higher rates, variously citing pent-up housing demand, banks' increasing willingness to make mortgage loans, strong consumer confidence, still-low real interest rates, and expectations of continuing rises in house prices. Nonetheless, refinancing activity was down sharply, and the incoming data would need to be watched carefully for signs of a greater-than-anticipated effect of higher mortgage rates on housing activity more broadly."
Homebuilders have delivered a consistent message in their earnings reports over the past two months or so that they are not overly concerned with the recent rise in rates (for example, see "Lennar Declares Itself Immune From Higher Interest Rates"). The consensus interpretation of the surprisingly large drop in new home sales reported on Friday (August 23rd) is that interest rates are indeed having an impact on the market. I think the more nuanced interpretation is that the housing market is finally taking a break after scorching monthly price hikes. This pause is overdue on price alone. It is too early to conclude that rates directly have cooled heels. The last sentence of the above quote reminds us that if the Fed does conclude that rates have finally put a dent in the housing recovery, the "full steam ahead" Fed Presidents might get a bit more cautious about tapering.
"Sizable increases in rates occurred following the June FOMC meeting, as investors reportedly saw Committee communications as suggesting a less accommodative stance of monetary policy than had been expected going forward; however, a portion of the increases was reversed as subsequent policy communications lowered these concerns…
… Subsequent Federal Reserve communications, which emphasized that decisions about the two policy tools were distinct and underscored that a highly accommodative stance of monetary policy would remain appropriate for a considerable period after purchases are completed, were seen as having helped clarify the Committee's policy strategy. A number of participants mentioned that, by the end of the intermeeting period, market expectations of the future course of monetary policy, both with regard to asset purchases and with regard to the path of the federal funds rate, appeared well aligned with their own expectations."
In other words, the Fed did it best to reassure everyone that it has every intention to remain accommodative. It has no interest in directly tightening policy at this juncture.
"In the July SLOOS, banks reported that they had eased standards on most categories of loans to households in the second quarter, but that standards on all types of mortgages, and especially on subprime mortgage loans and home equity lines of credit, remained tight when judged against longer-run norms."
The SLOOS is the Senior Loan Officer Opinion Survey on Bank Lending Practices conducted by the Federal Reserve. It is very likely that the Fed will continue to conclude that tight lending standards are having a larger impact on the housing market than higher rates per se. One of the amazing features of the current housing market recovery is the ability for such robust price increases in so many markets at the same time credit remains relatively tight. It is a sure sign that the average household is being priced out of the market. It remains unclear how, where, or when this growing pent-up demand will get cleared. Rising incomes would certainly help…
"The staff continued to forecast that the rate of real GDP growth would strengthen in 2014 and 2015, supported by a further easing in the effects of fiscal policy restraint on economic growth, increases in consumer and business confidence, additional improvements in credit availability, and accommodative monetary policy…
…Factors cited as likely to support a pickup in economic activity included highly accommodative monetary policy, improving credit availability, receding effects of fiscal restraint, continued strength in housing and auto sales, and improvements in household and business balance sheets."
Just as the Bank of England (BoE) has tried to do, the Fed is trying to remind the market that its expectations for a strong economic recovery in coming years is partially dependent on monetary policy remaining accommodative. It is part of a plea with markets to avoid getting ahead of things by over-anticipating higher rates. The Fed has had almost as little success with this message as the BoE has.
"Recent high readings on consumer confidence and boosts to household wealth from increased equity and real estate prices suggested that consumer spending would gather momentum in the second half of the year. However, a few participants expressed concern that higher household wealth might not translate into greater consumer spending, cautioning that household income growth remained slow, that households might not treat the additions to wealth arising from recent equity price increases as lasting, or that households' scope to extract housing equity for the purpose of increasing their expenditures was less than in the past." (emphasis mine)
To me, this statement was one of the most intriguing of all the statements in the minutes. I am guessing one ongoing frustration within the Federal Reserve is that accommodative policy seems to have been quite effective in goosing stock prices higher and perhaps finally getting the housing market moving, but very little to none of these impacts seems to be making a material difference in the lives of average Americans and average families. At the very least, the financial impact has been very imbalanced. Without the "trickle out" effect from higher stock prices and higher home prices, the Fed looses an important transmission mechanism for monetary policy. In the process, the Fed likely only helps to further exacerbate growing income (wealth) disparities in the country.
The overall message from the minutes for the housing market is that the Fed collectively is wary and watching closely. There are members who are quite hopeful that the housing market will prove resilient. The data in coming months will prove critical even as the seasonal home-buying season winds down to a close. I expect homebuilder stocks (ITB) to remain stuck in a holding pattern until some new trend appears to emerge in the data: the recent earnings reports are delivering little reassurance.
Be careful out there!
Additional disclosure: I am long one US. homebuilder: TPH