Morning Report: The Fed has a credibility problem 5/20/16

Stocks are up this morning as commodities rally. Bonds and MBS are slightly lower

Existing Home Sales rose to an annualized pace of 5.45 million in April, according to the NAR. The median home price rose to $232,500, an increase of 6.3% YOY. Total inventory is 2.14 million homes, which represents a 4.7 month supply at the current pace.

One of the Fed’s problems right now is credibility. As the minutes from Wednesday showed, the markets have been relatively complacent about the possibility of a Fed move. Part of that is certainly the Fed’s own doing, as they have tried to prep the markets for a rate hike several times over the past year or so, only to decide that the economy isn’t strong enough to withstand a rate hike. Here is the problem:

This is what the Fed’s forecast for 2015 GDP growth at all of the FOMC meetings starting in September 2013. As you can see, the Fed has been consistently high in its forecast for GDP growth. So, they begin to prep the markets for a rate hike based on their forecast that GDP will improve to a 3%+ rate of growth, and then back off when we start getting real numbers. I suspect the reason is because the Fed’s models are based on the garden-variety business cycle, where inventory build drives the process. We are in the aftermath of an asset bubble, and the problem here isn’t excess inventory – it is excess debt. And aside from the 1930s and Japan’s current experience, we don’t have a lot of experience with it.

Everyone knows auto loans are the new subprime, as low interest rates have pushed investors into riskier and riskier paper. Eight year car loans with rates around the current mortgage rate are common now. The other new issue: negative equity.

Separately, the CFPB is going after auto title loans as well as payday lenders. Is the government basically setting the stage such that the unbanked have nowhere to go to get credit? Many would like to see the post office become a bank.

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