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FEDERAL RESERVE’S DECISIONS MAY PUT U.S. IN A DEEPER RECESSION

By JEFF LAZERSON | Orange County Register

The economy is contracting, not expanding. 

Right after Donald Trump was elected president on November 8, market euphoria about the expectations of economic growth, health care and tax reform ensued and mortgage rates jumped a bunch. Freddie Mac rates were 3.57 percent on November 10. The Trump (effect) saw rates jump, hitting a high of 4.32 percent on December 29. Today Freddie stands at 3.97. Locally, the 30-year fixed mortgage is just three-eighths higher than election-day rates. And, the momentum points to lower rates ahead. 

Truth serum: Interest rates tend to rise in a demanding, expanding economy. They don’t drop.

How about some other key indicators of a contracting economy? Retail sales are slowing.  Inflation is on the decline.  Employment growth momentum is losing steam. 

Minutes from the March Fed meeting that were released earlier this month indicate that the Fed may start shedding its’ approximately $4.5 trillion balance sheet later this year. Named quantitative easing, about $2 trillion of this balance sheet was a result of the Fed buying mortgages from Fannie and Freddie during the height of the great recession to keep liquidity in the mortgage market.  

Do you remember back in 2013 the “Taper Tantrum”?  That’s when the Fed announced it was going to taper back its bond buying program. It caused quite an upset in the bond market, causing rates to jump.

With a cherry on top of its interest in unloading the balance sheet, the Fed continues to telegraph its intention to raise short-term interest rates two more times this year. “Yellen is three years too late in raising rates,” said Christopher Whalen, Chairman of Whalen Global Advisors.

You can’t deny it. Recessions happen. It’s just a question of when, not if. It’s been say seven or eight years since the last recession. We are due soon enough. We are probably just economic reports away from this becoming much more obvious. 

The Federal Reserve as an institution does not have a great track record about accurate anticipation of events. With all of the incredible amounts of rich government data, the Fed never saw the Great Recession coming. Typical ivory tower thinking.

Current Fed Chair Yellen and company may make matters worse and the recession deeper if she keeps up this fantasy inflation thinking. 

Please don’t dump the mortgage bonds on the market. And please don’t raise short-term rates Chairwoman Yellen. America is depending on you to do the right thing.

If you have questions or comments, please contact Jeff Lazerson by clicking here.

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