The Federal Reserve met last week and it made no changes to its large scale asset purchase program.  The late spring/early summer experience, where its communications about tapering the program were bungled, drove up interest rates, in expectation that stimulus would be withdrawn in the near future. As markets reacted, the Fed backtracked, and since has held policy steady.  The earlier backup in interest rates has affected the housing market, and the government shutdown slowed economic momentum somewhat.  Hence, current policy will remain in place a while longer.

This week we review the Fed decision through the first article.  In the second article review, we remind readers not to blame the Fed for low long-term interest rates—they are a natural reflection of future expectations.  Finally, we review what the National Association of Home Builders is saying about the housing slowdown.

Fed maintains strong stimulus as U.S. growth stumbles. The Federal Reserve made no change to its large scale asset purchase program when it met last Wednesday.  The Fed statement indicated “the Committee’s decisions about their pace

[i.e., level of asset purchases, currently at $85 billion per month] will remain contingent on the Committee’s outlook as well as its assessment of the likely efficacy and costs of such purchases.”  The statement noted the housing market has slowed, and that fiscal policy [i.e., government tax and spending policies] is restraining economic growth. The statement has analysts divided on when the Fed will reduce stimulus.

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Central banks never have full control of rates.  Despite the Fed’s efforts to control interest rates, they would be wise to recognize the power of “natural” interest rates, over which they have little influence, according to The Economist. “The central bank may tweak rates from month to month but, in the long run, deeper factors determine the ‘natural’ rate of interest, and the central bank defies them at its peril”, the magazine notes.  After citing several explanations, the magazine concludes:  “All this suggests that policy rates, low as they seem, are not out of line with their natural level.”  The Economist (tiered subscription model)

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Eye on the Economy:  Slowing Housing Sales.  From the National Association of Home Builders, “the housing sector entered a slow patch as the summer ended, one made worse by the economic uncertainty produced during the partial government shutdown.  With the shutdown ended—for now—and a federal debt ceiling extension in place until February, home sales are suffering due to lower affordability, increases in interest rates from early fall, and general uncertainty…The most important short-run consequence of the political drama in Washington was a decline in consumer confidence.”

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And in case you missed itclick here to read last week’s blog post which focuses on inflation risk.

We hope you enjoy reading these articles along with us and that you find them informative.  Please forward this to your friends and family.


J. Mark Nickell & Co.


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