All Things in Moderation

Vital Statistics:

Stocks are higher this morning as global equities rally. Bonds and MBS are up small.

Minneapolis Fed President Neel Kashkari wrote an essay on monetary policy. In it, he discusses how tight monetary policy currently is and how to measure that tightness. He addresses the argument that monetary policy is getting tighter because the Fed Funds rate is stable in the context of falling inflation. If inflation has fallen by 3% over the past year, that implies the real Fed Funds rate has increased by about 3.6%.

He believes that is one way to look at the issue, however he prefers to look at the yield on the 10 year TIPS – or inflation-protected securities. Under this model, real rates have risen about only 60 basis points. Since the economy has remained so resilient, he considers whether monetary policy is as tight as the first model suggests. “The implication of this is that, I believe, it gives the FOMC time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too-tight policy is going to derail the economic recovery.”

This is one vote for the higher-for-longer outlook.

The ICE Mortgage Monitor sees improvement in the housing market from late 2023: “Prospective homebuyers may feel an all-too-familiar sense of dread upon hearing that prices – already at record highs – rose another 5.6% in 2023 according to our ICE Home Price Index,” Walden said. “As always, the truth of the situation is more nuanced than one simple, backward-looking metric might suggest, and the data holds some encouraging signals for these folks. In recent months, we’ve seen improvement in rates, affordability, and for sale inventory, with monthly home price growth moderating on a seasonally adjusted basis. While we are still out of sync with historical norms on multiple fronts, each of those metrics have at least been moving in the right direction.”

New York Community Bank continues to get pummeled in the wake of its fourth quarter miss and dividend cut. The Financial Times reported that the bank’s head of risk left the company earlier this year and it wasn’t disclosed to the market. Apparently the acquisition of Flagstar gave the OCC veto power over dividend payouts and after tense discussions, NYCB cut the dividend.

NYCB is taking some losses on an office property and is also exposed to a lot of multi-family risk that is a feature of rent-controlled New York City landscape. Apparently a lot of developers bought fixer-upper rent controlled apartments with the intention of raising the rent after the renovations. The city changed the rules during COVID and the aftermath, which means a lot of these multi-family properties are struggling with the developer (and the bank) left holding the bag. NYCB was highly active in Brooklyn multi-fam and it looks like losses are coming down the pike on some of these loans.

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