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Wednesday, December 16, 2009

Comments on FOMC Statement, TIME Cover, and More

by Calculated Risk on 12/16/2009 04:11:00 PM

First, my thanks to everyone who visits this blog. Thanks - I appreciate the feedback in the comments and via email too.

I think the most important point in the FOMC statement was that they reiterated the ending dates for the Fed facilities and MBS purchases. The Fed is giving advance warning that these facilities will expire as previously announced. It would take a major credit or economic event to change these dates at this point.

There is some concern about what will happen when the Fed stops buying agency MBS. The important thing to remember is that there will be buyers; it is just a matter of price. My guess is that mortgage rates will rise about 35 bps (maybe 50 bps) relative to the Ten Year treasury when the Fed stops buying MBS. It could be more or less, but I'm surprised by how few analysts have tried to estimate the impact.

Tinfoil Cat There are some sites that think there will no buyers for agency MBS once the Fed stops the purchase program. That isn't correct; as I noted it is just a matter of price.

But this gives me an excuse to post this photo: Canaille the Cat models the proper attire when visiting those sites!

Credit: Planet Wally

The other important point in the Fed statement was the recognition that the housing sector is not as strong as it appeared in November. The wording change was small:

Dec: "The housing sector has shown some signs of improvement over recent months."

Nov: "Activity in the housing sector has increased over recent months"

As I noted this morning, existing home sales will be very strong in November (as buyers rushed to beat the initial tax credit deadline), but the indicators for residential investment have been mostly flat to weak in Q4. This includes the NAHB housing market index, housing starts, new home sales and the MBA purchase index.

Residential investment (RI) is the best leading indicator for the economy, and I expect the recovery in RI to be sluggish. In the fourth quarter GDP will be strong because of inventory restocking and stimulus spending, but my guess is 2010 will mostly be weak (I'll try to quantify this soon).

Also: I try to post data that I think is informative and useful. In that sense the blog is like a filing cabinet of economic data for me and hopefully for all the readers.

I'm going to try to post more analysis (this is a common request - and I know I've posted less analysis recently).

And finally - draw your own conclusions from the two covers below. I think Larry Summers looks as uncomfortable as the Canaille the Cat above.

TIME Cover Paul Krugman beat me to this: Bernanke and the cover curse

Credits (ht JA):
Person of the Year 2009: Ben Bernanke

TIME Magazine Cover: Rubin, Greenspan & Summers - Feb. 15, 1999