Forget about what the Federal Reserve Board did not do for a minute. Let's
talk about what they said. With the Fed, it is usually more likely that their
words will be more important than their actions, or lack of action. This has
been a very turbulent end of the summer for the markets. Above all, the Fed is
interested in restoring calm and especially making sure that their actions do
not add to the instability of the markets. And we certainly have had some
unstable markets during the past several weeks.
This is exactly why we were expecting "calming words" from the Fed when they
made their announcement. Did we get these words? Absolutely. The Fed said that
"recent global economic and financial developments may restrain economic
activity somewhat." Two things are important about this statement. First, it is
softened by using the word "somewhat," meaning the Fed does not see a risk of a
world-wide economic meltdown. Secondly, the Fed used the words "international or
global" more than once. The international issues broaden the scope of the Fed's
focus from just looking at our jobs or inflation numbers.
Bottom line is that the Fed did not raise rates, though they did leave that
option open for their last two meetings of the year in October and December.
That is good news for the markets and the consumer. The stock market has already
been under pressure lately and it did not need the extra pressure of a rate
hike. And rates on home loans are likely to stay low in light of the Fed's
decision. We can't think of better news for the consumer right now.
Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500
mike@mikeervin.com
Last week we talked about how times can change from week-to-week. With
regards to the somewhat "disappointing" jobs report released recently, we have
to reach back almost a decade to understand how our perspective changes over
time. The economy lost approximately 8.7 million jobs during the Great Recession
of 2007 to 2009. Since that time, the economy has added over 11 million jobs.
The unemployment rate peaked at 10.0% in October of 2009. It currently stands at
5.1%, near the 4.5% bottom it hit before the recession took place.
Keep in mind that this does not mean we have recovered completely. During
this time the country has added tens of millions to our population and therefore
we have not recovered all jobs lost. Why is this perspective important? Because
the Federal Reserve Board will be considering long term trends when they make a
decision regarding raising rates this week. Yes, the latest report is important,
but not as important as where we are headed. And therein lies the problem. The
Fed can't predict where we are headed either. For that the Fed would need a
crystal ball and they don't have one of those.
Certainly, the gyrations of the stock market will be considered by the Fed.
And not only our stock market, but markets all over the world and especially in
China. Is our market correction due to the possibility of the Fed raising rates
or the fear of an economic slowdown spreading to our shores from overseas? One
trend should be noted: short-term rates have risen during the past several weeks
and this tells us that the markets are expecting some action from the Fed.
Though short-term rates are not as "visible" to the consumer as longer-term
rates that determine the value of fixed rate home loans, short-term rates do
determine adjustments for those having variable rate home loans and this trend
bears watching.
Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500
mike@mikeervin.com
You may be thinking that we are talking about how the world has changed over
the years. For example, who would have thought that a conversation with our
children would most likely occur through texting on a machine that many of us
did not even grow up with years ago? Here we are talking about how things change
from week-to-week. During the past few weeks we have been illustrating factors
before and against a rate increase orchestrated by the Federal Reserve Board,
whose "Open Market Committee" meets next week.
On the plus side we had a strengthening economy and the creation of jobs. On
the negative side we had a correcting stock market, a stronger dollar, a slowing
economy overseas and plunging oil prices. In just a couple of days, the stock
market rebounded significantly, we had a significant upward revision in the
estimate for our economic growth in the second quarter and oil prices rebounded
sharply as well. In a matter of a few days, we went from not at all expecting a
rate increase to thinking that a rate increase could happen. Just to make things
interesting, a few days later, stocks and oil prices reversed again. If you are
confused, think how the Fed must feel considering this decision.
And then came the jobs report. What did the jobs report tell us? Even though
the addition of 173,000 jobs was less than expected, the unemployment rate
dropped to 5.1%, the previous month number of jobs added was revised upward and
wages grew a bit more than predicted. Overall, this report is a positive one for
the economy and, therefore, increases the chance of a rate increase next week.
Most analysts are putting the chances of an increase at 50-50 right now. Though,
one thing we can tell you is that the Fed does not like major uncertainty. And
there is plenty of uncertainty out there right now. Too much uncertainty may be
the overriding factor determining the results of this decision.
Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500 mike@mikeervin.com
