Morning Report: The Fed maintains rates

Vital Statistics:


Last Change
S&P futures 2928 4
Eurostoxx index 390.26 -0.72
Oil (WTI) 62.94 -0.66
10 year government bond yield 2.53%
30 year fixed rate mortgage 4.23%


Stocks are up this morning after the Fed maintained rates. Bonds and MBS are down.


As expected, the Fed maintained the Fed Funds rate at current levels, although they did tweak the rate on overnight reserves. During the press conference, Jerome Powell pushed back against the idea that the Fed’s next move will be a cut. Rates initially fell down the 2.46% level, but overnight retraced that move and we are back at levels we saw before the meeting. The Fed was surprised by the strength in both the job market and the overall economy and the fact that inflation remains lower than they would like to see.


At the press conference, a number of journalists asked about the market’s forecast for another rate cut. Powell stressed that the Committee’s view is that the current level of interest rates is “appropriate” and that core inflation was running close to the Fed’s target of 2% for most of 2018. The Fed Funds futures trimmed their estimates for a 2019 rate cut, from a 2/3 chance to more 50/50.  MBS spreads are slightly wider (meaning mortgage rates are a touch higher relative to the 10 year than they were yesterday).


Fed fund futures dec 2019


Construction spending fell 0.9% MOM and 0.8% YOY in March, according to the Census Bureau. Residential construction drove the decrease, falling 1.8% MOM and 8.4% YOY. Ex-residential construction, spending was solid, but we could see a downward revision in Q1 GDP estimates due to the resi numbers.


Productivity rose 3.6% in the first quarter as unit labor costs fell 0.9%. Q4’s productivity number was revised upward to 1.3%. Not sure what drove the decrease in unit labor costs – wages have been rising – but the problems with measuring productivity in this economy have been noted before. Regardless, the drop in labor costs and higher output mean inflation should remain below the Fed’s 2% target.


Initial jobless claims rose to 230k last week.


Lumber prices have been falling after spiking at record levels last year. Given that this is the time of year we should see more demand, this is surprising. The driver has been weather and continued weakness in homebuilding. Lower commodity prices should increase the margins for homebuilders and hopefully incent more homebuilding. Note that the S&P homebuilder ETF is up 25% this year.


What would happen to mortgage rates if we release Fannie and Freddie from conservatorship? Currently, Fannie and Freddie debt is treated as sovereign debt by investors, in other words, they believe the government will stand behind the debt if the GSEs run into trouble. This lowers their cost of funds, which gets passed on to borrowers in lower mortgage rates. If Fannie and Freddie are released from conservatorship, and the government no longer backs their debt, it will increase mortgage rates overall (their debt will definitely NOT be AAA), and will probably impact their ability to do perform the affordable housing part of their mandate. It is important to remember the reason why Fannie and Freddie were privatized in the first place – it was done in the 1970s to paper over the debt being issued to fund the Vietnam war. In a way, the government was using off-balance sheet financing, similar to the special purpose vehicles banks were using in the mid 00s. If there is more than 20% outside ownership in the subsidiary, then the parent is no longer required to consolidate the subsidiary’s debt on its balance sheet. In other words, they don’t have to claim that debt on their books, even if they are guaranteeing it. This accounting sleight of hand lowered the US debt numbers in the 1970s and it was hoped that this would help fight rising inflation (obviously that did not work). It may turn out that there would not be a bid for new Fannie Mae and Freddie Mac stock without a government credit wrapper, which means that hopes for a fully privatized Fannie and Freddie might turn out to be impossible to achieve.

26 Responses

  1. Peak 2019 already?

    “Why Biden 2020 Is So Maddening
    Christina Cauterucci

    His popularity inspires the same impotent rage as Brett Kavanaugh’s ascent to the Supreme Court.”

    The point about impotent rage seems spot on though. The fury is proportional to their inability to do anything about it and that seems to run through with Trump, Barr, etc.


    • Putting the “O” in “overwrought”


    • I got a chuckle out of this:

      In the “Icons” section was a blurb on Ford, written by Sen. Kamala Harris, who described her subject as a woman who “had a good life and a successful career—and risked everything to send a warning in a moment of grave consequence.”

      What was the risk? That she would vault to the apex of the Victimhood Totem Pole, get the adulation and sympathy of the left and probably earn a boatload as a speaker and writer?


      • In fairness, she’s also experienced a lot of harassment and blow back.

        I’d draw a distinction between Ford herself and the various people who leveraged her against Kavanaugh.


        • She may have bit off more than she can chew, and found the experience ultimately unrewarding. However, the risk she was taking was in line with the risk Kavanaugh was taking in accepting the nomination. Harassment, public humiliation, etc.

          Not like the risk of someone being an informant on the mob or something.


        • I don’t think she ever intended go public. It was a leak by the committee.


        • “Harassment, public humiliation, etc.”

          Death threats to her and her family. The nutty people are nuttier these days.


        • Fair enough. Still not sure about the risk-assessment: as you say, nutty people are nuttier and she did not have much in the way of solid corroboration or evidence. So there was always a high degree of likelihood her revelations wouldn’t accomplish much, and always a reasonably high risk that she’d get exposed (and thus be subjected to the nuts and deaththreat people).


    • Today, he sits with the other justices in one of America’s most secure and powerful jobs; he can wear a stately black robe and write abortion rights out of the Constitution until he dies.

      Actually, abortion rights aren’t in the constitution nor can justices write anything out of the constitution or amend it in anyway. They may issue rulings that stretch or distort the meaning of the constitution until its unrecognizable, or at least suggest precedent dictates a ruling as the constitution does not speak to the issue, precisely. But that is not writing anything out of the constitution.

      But she would like to be treated like a Serious Political Thinker. Hmm.


  2. PL is doing it’s best to convince me to vote for Trump in 2020 simply to prevent them from gaining a victory based on the tactics they are employing.

    Trump being reelected (ideally with a popular vote majority) may be the only thing that breaks the “Russia fever” that has gripped Democrats and progressives.

    Scott Adams point about America watching two entirely different movies has never seemed more appropriate than in the reaction to the Mueller report.


    • ideally with a popular vote majority

      I feel that’s unlikely, California likely being the spoiler in that case.

      And my operating assumption is, if Trump gets re-elected, the lefts assumption is going to be that Russia somehow hacked the election again!


  3. Love this comment,

    Trump will certainly try to use the DOJ to go after his 2020 opponents.

    We’re entering uncharted territory…
    Please log in or sign up to continue.
    soulflower May 02 · 01:15:06 PM

    Are we actually in unchartered waters?


    • Maybe he should have the IRS slow walk the tax-free approvals for all the left-leaning organizations..


  4. I did not know this.


    • Barr should just say he’s perfectly willing to testify in the same format that Hillary Clinton did in the Benghazi hearings.


    • My understanding is that’s not how it works, and I can’t recall it ever working that way. What’s more, in the culture of DC, it seems to me that saying I’m going have to have my flunkies or others much lower on the totem pole question you is an attempt to establish relative status.

      I think the correct response would have been to say: “Fine. I’ll send some low-level lawyers to attempt to respond to the questions of your staff.” But status wise, anybody in Barr’s position would be foolish to go along with that attempt and diminishing the status of his position.


      • They don’t want Barr to testify and this is how they’re doing it.


        • They want a narrative where they are the Brave Heros and the administration are the Small, Frightened Petty Tyrants and Criminals that they are nobly pursuing, a big bucket of KFC in each arm.

          It’s such obvious kabuki theater. Everyone who gets super-excited and engaged and thinks “oh, this time we’ve got that evil president and his minions” are like the folks who take pro-Wrestling seriously. It’s staged and scripted with plenty of improvisation but at the end of the day it’s 90% bs.


  5. This is interesting:

    Reading Barr’s June 2018 memo alongside the last twenty pages of the Mueller Report is a curious experience.

    Together, they read like dueling legal briefs on the meaning of 18 U.S.C. § 1512(c)(2); the type of material one would expect to see from adversarial appellate litigators.

    So-why did Robert Mueller dedicate 20 pages of his report to a seemingly obscure question of statutory interpretation? Why did Bill Barr write a detailed legal memorandum to Rod Rosenstein about that very same statute?

    And how, exactly, did Bill Barr know that that § 1512(c)(2) was central to Mueller’s obstruction theory – in June 2018, when he was still in private practice at Kirkland?

    After some consideration, I arrived at a theory that I believe answers these three questions, and others as well. For example – why was AG Jeff Sessions asked for his resignation the day after the midterms? Why was Bill Barr the only name ever seriously floated for AG? And is it merely a coincidence that six weeks after Barr’s confirmation, the Mueller probe came to an end?

    …This is a story about a legal chess match played for the highest stakes imaginable: Trump’s Presidency – and whether it would be under the cloud of an endless special counsel investigation – hinged on the result.


  6. I had no idea that Airplane! was an almost scene for scene parody of a 1950’s movie.


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