It's The Economy Stupid: Housing and Big Ben

Housing & Building Numbers:

 

Economic Event	Period	Economic Survey	Actual Reported	Original Prior	Revised Prior
MBA Mortgage Applications	JUL 13		16.9%	-2.1%
Housing Starts	JUN	745K	760K	708K	711K
Housing Starts MOM%	JUN	5.2%	6.9%	-4.8%
Building Permits	JUN	765K	755K	780K	784K
Building Permits MOM%	JUN	-2.4%	-3.7%	7.9%	8.4%

 

Housing Starts were better than expected, Building Permits were worse than expected.  Single family housing and single family building appears to be doing better, but not great.  A mixed bag at best.

 

 

Big Ben: 

 

What we learned about what goes on in the minds of the propeller heads at the Fed is that something called the IOER Target is now in play.  The Fed minutes released revealed the Fed's scary take on draining excess bank reserves.

 

The Federal Reserve has come up with a new acronym, IOER. It stands for INTEREST RATE ON EXCESS RESERVES.  Sounds innocent enough, pretty straight forward.  It’s the interest rate that the Fed pays banks on their reserve deposits at the Federal Reserve Bank.  Currently the Fed is paying 25 basis points (0.25%) on $1.5 TRILLION in excess reserves that serve NO economic purpose. In the FOMC minutes released today, it is clear that the Fed is considering a major role for the IOER when it comes to managing the money supply.

 

The minutes show that the Fed has had extensive discussions on the IOER and methods they are considering to control the money supply.

 

How confident is the Fed about the proper method to drain the huge amount of reserves that now sit on the Fed's balance sheet?  Not very.

 

This is truly remarkable, the Fed has pumped all these reserves into the system and they really are not sure how they should drain them:

“Participants recognized, however, that the supply of reserve balances would need to be reduced considerably to lift the funds rate above the IOER rate. Several saw advantages to using the IOER rate, rather than a target for a market rate, to indicate the stance of policy. Participants noted that their judgments were tentative, that they would continue to discuss the ultimate operating regime, and that they might well gain useful information about longer-run approaches during the eventual withdrawal of policy accommodation.”

 

The only thing you can read into this is that the Fed is going to "try stuff" and see what happens. There is no other way to interpret it:

“Participants noted that their judgments were tentative, that they would continue to discuss the ultimate operating regime, and that they might well gain useful information about longer-run approaches during the eventual withdrawal of policy accommodation.”

We are talking about the control of the money supply of the country and they are going to play it by ear as they go along, to see what works and what doesn’t.

 

Scary

 

 

John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury