FOMC - 8 Aug 2006

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FOMC meeting tomorrow (8/8/06). What will the Fed do with interest rates tomorrow. They have raised them every meeting for almost 2 years now. More details at: Fed Day Charts

quote:
Based upon the August 7 market close, the CBOT 30-Day Federal Funds futures contract for the August 2006 expiration is currently pricing in a 20 percent probability that the FOMC will increase the target rate by at least 25 basis points from 5-1/4 percent to 5-1/2 percent at tomorrow’s FOMC meeting (versus an 80 percent probability of no rate change).

Summary Table
August 1: 64% for No Change versus 36% for +25 bps.
August 2: 64% for No Change versus 36% for +25 bps.
August 3: 59% for No Change versus 41% for +25 bps.
August 4: 83% for No Change versus 17% for +25 bps.
August 7: 80% for No Change versus 20% for +25 bps.
August 8: FOMC decision on federal funds target rate.

Interesting how the probabilty has swung form around the 60% mark to the 80% area. This is in my opinion going to cause more volatility in the market than usual irrespective of the rate decision.

The wording that goes with the pause will be important, I will be looking for wording that placates the Bond Market Bears.

A pause in the face of oil poised to breakout above $80 per barrel is a tenuous proposition. A rapidly weakening economy within the background of a strong uptrend in energy prices does pose a conundrum for the Fed.

The Fed is having a tough job. I'm not sure if you read about the housing market in The Economist about a year ago. There was the best article ever about the housing bubble and The Economist did all this research and determined that it is the biggest bubble in any market that the world has ever seen.

Now just as the housing market comes off the boil and the housing futures show a down turn (in part due to the Fed's actions) it takes one problem out of the Fed's hands but oil as you point out just puts another problem right there.

I don't envy their job one little bit.

true, the housing market flew right off the cliff.

I was just reading a related article that shows the housing market peaked Sept 2005, coincident with the Hurricane Katrina event.

In hindsight, the excess liquidity that created the 2000 stock market bubble and subsequent crash shifted into the housing market and created this housing bubble. The liquidity never left the system, it just moved from one market to another.

The Fed going on pause today (?) signals a softening of policy and subsequent increased liquidity in the system, the question is, what market will that liquidity move into ?

We are seeing some of the liquidty finding a home in large cap value stocks, dividend stocks. I think this is basically a play on the idea of a flat yeild curve and softening economy.

Oil has so many factors affecting it, constricting supply, inelastic refinery capacity, geopolitical risk, increasing global demand, and this excess liquidity problem the Fed continues to create (some of which is finding a home in the energy markets.)

Well I'm wondering about the impact of the housing market on the stock market in terms of liquidity from people who have been releasing equity from their appreciating house prices for everything from vacations to home improvements to market investment and speculation.

I am hearing more and more stories about people canceling new homes that they've ordered (and losing the earnest/deposit) because they can't sell their existing home for what they were expecting and other folk who are going into debt because they have spent the appreciation they saw in their houses and now the house value has dropped and they can't recoup their mortgage and home equity loan through the sale of their house.

So if this becomes a prevalent theme in the economy we may find individuals liquidating stock holdings to cover shortfalls from cash that they were expecting and budgeting from their homes. The impact of this is only just being seen now because, as you mentioned, the peak was about 9 months ago and so the full effect of this is not yet known. Last time I checked the housing futures they all showed drops through to a year out so no telling if this is a downturn, pause or flattening out. The chances are, in my opinion, that this will cause the equivalent of a squeeze in the housing market forcing home investors into sales they don't want to execute which is the most dangerous type of market - i.e. a panic.

I feel that I'm getting a bit off topic here because this is about the Fed rate announcement in less than 2 hours (as I type this) but I was chatting to someone the other day who sells new homes. She said that her office had sold 50 new homes the previous month. Unfortunately, she said, 51 of the previously sold new homes had sale cancellations because the new owners couldn't sell their houses.

So my thinking and theory is a spill over into the equity market here.

Release Date: August 8, 2006
For immediate release

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

Readings on core inflation have been elevated in recent months, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.

quote:
Originally posted by day trading

Well I'm wondering about the impact of the housing market on the stock market in terms of liquidity from people who have been releasing equity from their appreciating house prices for everything from vacations to home improvements to market investment and speculation.

I am hearing more and more stories about people canceling new homes that they've ordered (and losing the earnest/deposit) because they can't sell their existing home for what they were expecting and other folk who are going into debt because they have spent the appreciation they saw in their houses and now the house value has dropped and they can't recoup their mortgage and home equity loan through the sale of their house.

So if this becomes a prevalent theme in the economy we may find individuals liquidating stock holdings to cover shortfalls from cash that they were expecting and budgeting from their homes. The impact of this is only just being seen now because, as you mentioned, the peak was about 9 months ago and so the full effect of this is not yet known. Last time I checked the housing futures they all showed drops through to a year out so no telling if this is a downturn, pause or flattening out. The chances are, in my opinion, that this will cause the equivalent of a squeeze in the housing market forcing home investors into sales they don't want to execute which is the most dangerous type of market - i.e. a panic.

I feel that I'm getting a bit off topic here because this is about the Fed rate announcement in less than 2 hours (as I type this) but I was chatting to someone the other day who sells new homes. She said that her office had sold 50 new homes the previous month. Unfortunately, she said, 51 of the previously sold new homes had sale cancellations because the new owners couldn't sell their houses.

So my thinking and theory is a spill over into the equity market here.

Sorry. Operator error and I just got out of class. Tired. Good points all about the money and housing bubble. Another consideration is that many of the loans used to finance the bubble were adjustable rate and interest only types. These products are having an impact on the bearers and, as you said, they may be forced to cover some notes or take some deep losses on the property. I know here in the Phoenix area prices are retracing and some people are losing money and/or in a serious financial crunch because of it.

I completely agree Steve.

If this sort of thing interests you then I highly recommend The Economist artcle (Jun 16th 2005) which I've linked here:

The global housing boom

The article opens as follows:

The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops...

NEVER before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stockmarket bubble burst in 2000. What if the housing boom now turns to bust?

Of any of the research that I trust that I read The Economist is right at the top of the list.