Waiting for the other shoe to drop and its getting sticky.

Since the housing boom ended in mid-2005, the Fed has continued to play the roll of inflation hawk, worried that an over heated economy will force them to raise the federal funds rate even higher. I get the impression that they have been saying this for so long (2004) that they seem to be missing the economic slowdown (of course, I am exaggerating).

This topic is covered in the Bloomberg piece Bernanke Is Wrong on Inflation, Goldman, Merrill Say.

“House prices could decline as much as 10 percent,” said Maury Harris, chief economist at UBS in New York, in an interview. UBS, based in Zurich, is the world’s biggest money manager for the wealthy. Fed research doesn’t agree. The central bank reported “signs of stabilization in housing demand in most regions of the country,” according to the April 11 report. “Home-buying attitudes improved and continuing job growth could be expected to support home sales.”

I wonder if they are speaking to New York market participants only, because the market here is one of the few in the country that is doing well. The economy is showing weakness and a recession is a growing concern but not on many people’s radar these days.

GDP grew 1.3% in the first quarter, averaging 2.2% for the past year and well below the Fed’s 3% expectation level.

Two hands…
On one hand, the Fed is concerned about inflation and higher mortgage rates further crippling an already weak housing market. On the the other hand, the other side views the economy as not yet bearing the full brunt of the housing slowdown. I have been on the latter side, contending that the lag time for housing to fully impact the economy is probably more like 1-2 years from the point the housing market began to slow.

Since that point was about mid-2005, that means right about now. Yet the odds of a rate cut seem to be slipping. Muddy economic discussions lumber along, with an occasional insertion of the word “inflation” to nudge us awake periodically.

Housing prices tend to be sticky on the downside, falling at a far slower than they rose since many sellers simply opt not to sell. Hence the delayed housing market reaction, only accelerated (or primed – ok, sorry) by subprime. Nationally, foreclosures are rising, the number of sales are falling and prices are slipping.

I am guessing that if the Fed is very much wedded to holding firm for a while, which will keep mortgage rates stable and at low levels, but if it doesn’t cut rates by the end of the year, its going to get sticky and we may be using the “R” word a whole lot more. Or perhaps the “S” word (stagflation).

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