Mel's Blog

During the recent easing cycle, the Fed cut rates six times prior to yesterday.  Each time the media got it wrong by saying it was good for rates, but your advice to clients and referral sources was right on the money.  Congratulations for knowing that Bond prices would react negatively on inflation fears from rate cuts.  Then yesterday, CNBC's Diana Olick and many others thought they finally had it figured out and said the impact of this 7th Fed cut will cause home loan rates to worsen and move higher.  Unfortunately for the media listeners and viewers, they went 0 for 7, as they again incorrectly analyzed the impact of yesterday's .25% cut to the Fed Funds Rate.  Although the Fed cut rates once again, my update and advice said "There is speculation that the Fed may signal the present cutting cycle is nearing an end, especially in light of renewed concerns over inflation.  If this is indeed the case, we may actually see Mortgage Bonds improve on the news". 

The cut to the Fed Funds Rate bringing it to 2% was not a unanimous decision.  The vote was 8-2 in favor with Dallas Fed President Richard "Loose Lips" Fisher and Philadelphia's "Three Swing" Charlie Plosser, dissenting and preferring no cut.  This is part of the message that the Fed is now in a "pause" mode instead of an "easing" one.  Both Loose Lips and Three Swing Charlie had dissented at the last meeting as well.  But that was in regards to not cutting as deeply - this time, they wanted no cut at all.  Additionally, the Fed statement was very clear that they will "monitor" the situation, as they used that word twice in their carefully crafted short statement.  This tells us that the Fed is done with cuts, unless something really ugly happens.  

The headline Personal Consumption Expenditure Index (PCE) was reported at 3.2% on a year over year basis, slightly improved from last month's 3.4% reading.  The Core PCE, the Fed's favorite inflation gauge, was slightly higher in March.  PCE was up 0.2%, which was hotter than expectations of 0.1%.  This brought the important year-over-year Core PCE to 2.1% and just above the Fed's desired range of 1 to 2%.  Personal Income was reported at 0.3%, a bit higher than expectations of 0.4%.  Personal Spending was reported at 0.4%, twice as hot as expectations of 0.2% and may show how rising food and commodity prices in March have negatively affected consumers. 

Initial Jobless Claims were reported at 380,000, much worse than expectations of 360,000.  This left the four week moving average of continuing claims at the worst level since early 2004.