We will soon enough discuss the Fed’s unseemly super-sized rate cut of 50 basis points. Keep in mind that this is way out of normal ranges. Historically, reductions of this magnitude occurred only when the central bank or its pet charges, banks and big financial players, were in freakout mode. The last time the Fed made this big a rate slash was during the worst of the financial crisis, in October 2008.
But the fact that the US and other advanced economies have gotten themselves in the situation where they have shifted so much responsibility for economic management to democratically unaccountable central banks merits some comment.
It’s not hard, and not even all that wrong, to blame where we are on Milton Friedman. Yes, he was far from the only leading light of the libertarian campaign which has been a rousing success in making governments loath to govern. But Friedman was a tireless and very effective propagandist, which included a best-selling book, “Free to Choose” and a multi-part TV series of the same name.
The problem with where we have wound up in the US is that dirigisme is a dirty word, yet we have an extremely large number of interventions in the economy at the product/sector level via targeted government spending programs and tax breaks. The result is what I call industrial policy by default, as in the funds go not based on a top-down idea of what national priorities and macroeconomic policies should be, but the effectiveness of various special interests in getting goodies. Mind you, some of the latter is inevitable. But in the US, the degree of spending and price distortions that are the direct result of subsidies shows this system is doing affirmative harm. Overpriced housing, a bloated and not very effective military, a patient-gouging, underperforming health care sector, and wildly expensive, administrator-enriching higher education system are the most glaring examples.
Friedman, described by his son as a libertarian anarchist, also wanted central banks to play a limited role. His belief that money supply growth regulated economic activity, if it had been correct, would have limited central bank freedom of action. They would have been expected in all but highly abnormal times (think the Covid shock) to set a monetary growth rate and leave it be. But experiments by the Reagan and Thatcher governments with trying to manage via monetary targets found that monetary growth correlated with no economic variable, so the idea fell out of fashion.
While this is a deliberately oversimplified story, it does help explain why we got where we are now, with Administrations pretending they aren’t much responsible for overall economic management, and the Fed being expected to fill the gaps. So we have policy schizophrenia, with the Biden Administration running large fiscal deficits while the Fed keeps monetary policy very tight to try to compensate.
And do not kid yourself that monetary easing is a very good way to try to boost groaf. The effect of interest rates is asymmetrical: higher interest rates can and do constrain growth by making borrowing to fund expansion or mere upkeep more expensive. But most executive and business owners will not invest in new capacity just because money has gone on sale. They beef up operations in response to signs of more demand in their sector, or perhaps improvements in an adjacent line of business that they’d like to exploit. The big exception to this rule is operations where the cost of borrowing is one of their biggest expenses. That translates into financial institutions and leveraged speculators (which includes some real estate developers).
If you have any doubt, look at the decade following the financial crisis. The Obama Administration was criticized for not running a big enough deficit to counteract the economic shock. Instead the Fed and other central banks held interest rates in negative real interest rate terrain. And what resulted? A protracted period of widely decried secular stagnation.
So now to the unseemly 50 basis point cut. Mr. Market having lobbied so hard for it no doubt at least partly explains the comparatively limited commentary on why the Fed thought such a big reduction was warranted. Admittedly, the Bureau of Labor Statistic made a big downward revision to job growth in late August. But many analysts regarded this change as not all that worrisome. For instance, from CNBC:
- No recession has been declared.
- The 4-week moving average of jobless claims at 235,000 is unchanged from a year ago. The insured unemployment rate at 1.2% has been unchanged since March 2023. Both are a fraction of what they were during the 2009 recession.
- Reported GDP has been positive for eight straight quarters. It would have been positive for longer if not for a quirk in the data for two quarters in early 2022.
As a signal of deep weakness in the economy, this big revision is, for now, an outlier compared to the contemporaneous data.
Similarly, right before the Fed made its decision, the widely-considered-to-be-very-accurate Atlanta Fed GDP Now, said the economy was percolating along nicely. The 3Q estimate had just been revised down from 3.0% to a still nicely expansive 2.9%.
New Dealdemocrat argues that that plus other indicators show a recession is no where in sight (forgive me for omitting the charts; you can get the drift of the gist without them and check at the link if you want to verify):
There are some economic and financial indicators that aren’t classic leading or lagging indicators. Rather, they are “over-sensitive” in one direction or another. Two good examples are heavy truck sales and the unemployment rate: they are over-sensitive to the downside: they lead going in to recessions, but lag coming out.
The S&P 500 stock market index fits in this category as well. The classic aphorism is “the stock market has predicted 9 of the last 4 recessions.”
But the converse is not true. With the stellar exception of 1929, when stocks themselves were in a bubble, if the market makes a new high, it’s almost a sure bet that the economy is not in a recession….
Another way to look at that is to update my “quick and dirty” economic indicator of the YoY% change in stocks and the inverted YoY% change in initial jobless claims. Here’s what that looked like in the five years before the pandemic, showing that stock prices were lower YoY several times with no recession occurring (showing how they are over-sensitive to the downside).
Now on the flip side, there’s been a lot of anecdata about collapses in demand at certain retailers, from Dollar Stores to Wayfair. And although it does not come out cleanly in data, the US seems even more than ever to be a two-tier economy, with those on the bottom still very much squeezed by price increases. Even if prices are not going up much now, past prices are seldom being rolled back and wage growth is still far from making them whole.
In keeping, the Wall Street Journal pumped for a big rate cut right before the Fed made its move, in, Americans Are Desperate for Relief. The Rate Cut Is a Glimmer of Hope. Representative sections:
Just as it took time for higher rates to slow things down, it will take time for rate cuts to speed things up.
The cuts will make many household budgets stronger, on balance, and potentially begin to lift some of the bad economic vibes that have puzzled Washington and Wall Street. Across the world’s largest economy, those little differences are multiplied by millions of people who borrow money to finance big purchases, invest in companies or buy day-to-day necessities.
The article then turns to a heartwarming story of a couple that stretched to buy a home in very pricey Seattle with a mortgage at 6.99%. They are explicit that they bet on being able to refi and get their monthly costs down. Consider Investopedia on this topic:
One of the best and most common reasons to refinance is to lower your loan’s interest rate. Historically, the rule of thumb has been that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance.
Why would lenders give that advice? Because they skim off a lot of the economic value of the lower financing costs in their fees!
Having said that, it is true that mortgage interest rates affect the economy is via refis. This was a not-well-acknowledged source of stimulus in the post crisis era. Many homeowners increased their disposable spending levels by refinancing at bargain-basement mortgage interest rates. But a 50 basis point reduction from a high level will produce bupkis on this front.
And to add insult to injury, the Fed move did not further lower mortgage rates, in fact they increased a smidge. From Morningstar:
Here’s a puzzle for market watchers: Hours after the Federal Reserve cut interest rates Wednesday for the first time since 2020, mortgage rates ticked up by 4 basis points.
Why? And are mortgage rates on an upward trend from here on out?
MarketWatch spoke to economists who said that the increase is a temporary one, likely due to how markets are assessing the central bank’s next move.
“This is a temporary blip. There’s no reason why they shouldn’t continue their decline for a while,” Robert Frick, a corporate economist at Navy Federal Credit Union, told MarketWatch.
“I fully expect that [the 30-year mortgage rate] will settle below 6% in the next month or two,” he said. “So my advice would be [for people to] try to not read too much into it, because the market is fickle.”
One argument for the Fed action is to help home buyers who in many cases find housing to be unaffordable. But as Wolf Richer pointed out in a post-rate cut piece: Demand for Existing Homes Wilts, Supply Spikes to Highest for any August since 2018, Prices Dip, Despite Mortgage Rates that Have Plunged for 10 Months. Wolf maintains that most markets are in the throes of a buyer’s strike because prices are still too high. Of course, the other way to look at this is wage growth has been too low.
We’ll now return to the Journal’s plea for cuts:
Now that rates are moving down, that alone could be enough to make more households and businesses feel all right about spending. The Fed’s projections released Wednesday suggested that the central bank will cut rates by another 1.5 percentage points by the end of next year.
In other words, the Confidence Fairy has returned. As we indicated, her magic didn’t work terribly well post crisis, with extreme rate reductions. So why should now be different? The Journal turns from housing to cars:
Even so, Fed cuts will gradually ease some of the pressure on prospective car buyers heading to dealerships such as Stehouwer Auto Sales in Grand Rapids, Mich. Three years ago, Vice President Kelly Herb said customers with top-tier credit scores could buy a year-old car with a loan that had an annual percentage rate as low as 2%. He estimated that the roughly 6% rates now common would translate to about $50 more a month under that scenario.
“When times are good, people don’t really ask about rates,” said Herb, whose customers struggle with more expensive child care and housing. “When times are like they are now, it’s one of the first things they ask.”
The used-car dealership now sells roughly 30 vehicles a month, the longtime salesman said, down from as many as 50 during the pandemic when rates were low and government stimulus was flowing.
Again, used cars skew more to the bottom half of the two-tier economy. Even so, as some readers have pointed out, in the long-ago days of their youth, it was possible to buy a new car outright on merely some months of savings on modest wage. The fact that living costs across the board have gone up so much over time that car financing is now pervasive is seldom questioned.
Reading into the tone, as opposed to the particulars, of the Journal story, one senses the authors are having to work a bit to demonstrate real economy, as opposed to financial market, impact.
So why the big cut? One could be cognitive capture, that Mr. Market had been nagging the Fed so long for its precious rate-reduction boost that some at the central bank had internalized that it was overdue despite inflation figures not giving them the justification they wanted. So the outsized reduction included some perceived catch-up.
A second possible reason is political. Trump has made clear Powell is out if he wins. This rate cut comes too late to give the economy any lift before the election. But the impact on stocks and bonds will cheer investors, some of whom are donors. So Powell may hope that this action will put him in good stead with a Harris Administration.
A variant of the notion politics played a part is that three Democratic senators, led by Elizabeth Warren, wrote the central bank calling for a 75 basis point cut. 75 historically has happened only in “shit hitting the wall” level crisis times, so if even the Senators has gotten what they wanted, it could well have backfired by signaling that the central bank was seeing multiple indicators of serious problems.
An alternate view is that the Fed really was panicked. One proponent is Tuomas Malinen:
Make no mistake. 50bps cut, is a panic cut. So, why did the Fed panic?
Most likely, there were four reasons:
- The Fed is racking up massive losses.
- Political pressure to not crash the markets before the Presidential elections on November 5 (last FOMC meeting before).
- The Federal Reserve is genuinely worried about the economy, but especially about debt levels.
- Banking sector fragility.
We’ll put aside #2 since we discussed it briefly above, and #1 since central banks don’t need positive equity. His arguments for points #3 and #4:
I concluded my last weeks piece by noting:
Banks seem somewhat optimistic and they have eased lending standards. There is not much room for leveraging among corporations and especially among households, though, which shows in the stagnation of borrowing. This indicates that the optimism among banks is likely to be a “false positive”. Their optimism can, for example, be based on the assumption that the Fed easing would create favorable conditions for an economic recovery. Due to the very high level of indebtedness of households and corporations, I consider this to be unlikely. This implies that we could see, possibly a drastic, turn into re-tightening of lending standards and softening of credit demand in the coming quarters….
U.S. banks continue to struggle under a gargantuan amount of unrealized losses. They arise mostly from the same source as with the Fed, i.e. from Treasuries losing value, en masse. We also noted in the August World Economic Outlook of GnS Economics that the outflow of core deposits seem to have re-started. Deposit outflow is a major risk for the banking sector, because it implies waning trust and, as banking is a business of trust, waning trust implies growing fragility in the banking sector. The Fed cannot stop the outflow of deposits, but it can try to diminish the unrealized losses by cutting interest rates, and hoping that Treasury yields follow. At the time of writing, this was not going well with, e.g. the yield of U.S. 10-year Treasury note shooting up. This is an (early) indication that the bond market now expects inflation to pick up.
Malinen oddly omits a big source of pain at many banks, which is lending to office space in major metro areas, particularly in so-called B and C space, as in older buildings in non-prime locations. These properties are causing serious problems not just for banks but their cities, since it’s pretty sure there will never again be enough demand to re-fill these buildings as office space, and they aren’t well suited to a fix that is being selectively implemented, that of converting them to residential space (before you pooh-pooh, that has happened to a considerable degree in the Wall Street area, but even though the buildings were not-so-hot, many had enough open or water views to make the conversions viable).
Arguing against Malinen is that we’ve seen a lot less overt distress, particularly since the Fed offered a bailout-of-sorts via special liquidity facilities. However, the Fed could easily be have been on the receiving end of intense private lobbying, with the banks making a combination of actual and exaggerated claims of being in a world of hurt.
The information here is so fragmentary and anecdote-driven that it probably makes more sense to see if there is further corroboration of any of these views. But if readers have any local intel, that can still help flesh out a better picture.
I fear that the real reason that the Fed is decreasing rates now is they think they have their favorite boogeyman, the wage-price spiral, under wraps. With a combination of immigration and the sharp rise in rates the hot job market of 2 years ago has been successfully smothered. They don’t seem to be hitting their stated 2% target inflation rate, but that seems like a secondary concern.
Interesting video by Aswath Damodaran on why the Fed doesn’t really influence most interest rates anyone cares about:
https://www.youtube.com/watch?v=RpuuRS6mkx8&t=4s
“Trump has made clear Powell is out if he wins. This rate cut comes too late to give the economy any lift before the election. But the impact on stocks and bonds will cheer investors, some of whom are donors. So Powell may hope that this action will put him in good stead with a Harris Administration.” ******* So many (all?) of our elites seem to believe they are what our leaders say America is – exceptional and indispensable. That, or just enormously greedy and corrupt. Lordy, Powell is 70 yrs old! If Harris let’s him have another term, he’ll be 75 when it ends. They never retire. Look at Biden, Mitch McConnell & Pelosi, all on Dementia Autopilot. We got ourselves a ruling aristocracy than runs our nation until they lierally die, like the English Kings and Queens. These people aren’t advanced aged John Mearsheimers making contributions to critical thinking policy choices. They are just keeping the wheel at the helm steady and blocking and change in direction.
Yes. And political–ya think? The reality is that everything these days is political and most especially Friedman and other economists who pretend to be handing down wisdom from Olympus. The gerontocrats are so into themselves that they think the late seventies Trump is going to be the new Hitler. Between naps?
The rest of us are all in the back seat of this jalopy careening down the highway.
Powell just tossed a life ring at the over-leveraged finance crowd.
That’s part of it as well. To be crude: interest rate changes also facilitate arbitrage, and the “churn and skim” of a financialized economy. How else are parasites supposed to “make money”? The US does not have much of a productive economy left.
MRSYK wrote: “Powell just tossed a life ring to the over-leveraged finance crowd.”
I have had similar thoughts. Some member of their “CLUB” needed a rate cut.
I remember i listen to one interview where Hudson said fed cant push up the rate because this would crash the economy, so many companies have took cheap loans to buy stock.
No, most did not use loans. They issued bonds. I have not seen anyone suggest there is meaningful rollover risk.
Isn’t issuing a bond exactly the same economically as a loan?
A loan has one counterparty, and is usually callable under various tight strings. The lender has the upper hand.
A bond issuance usually has many counterparties, and usually it is very difficult for the counterparties to cause any real trouble for the borrower. If they’re not happy, they sell the bond.
In 2008, the warning was a trip to a crowded mall to buy brown shoes (ugh). No one had bags. The Dollar General type stores woes seem like a problem. The jobs data has never produced salaried jobs, so I feel like this is a hit in the post covid prosperity from a labor shortage.
I would also note the last official day of CARES ACT spending is 9/30. Unlike, money spent in Ukraine or tax credits, CARES was immediate cash injected into local economies. I suspect panick is part of the story.
Powell should never have been reappointed, so I don’t think he would expect to stay. Harris will be under immediate pressure. My gut is Powell is gone under any circumstance. The big difference is Biden is dumber than Shrub, and the 2024 election results aren’t baked in. Electeds are too illiterate to make long term decisions and too afraid that turmoil will cost a seat. Obama could take unpopular positions because he was going to win big. Harris if she was as bright as Obama can’t do that.
Well, praise the Lord, we may have finally killed off the last of the helicopter money from the biggest panic in history. In 2020-2021, confetti money was sprayed helter-skelter across the entire economy – airlines, bars, restaurants, PPP swindles (still going on, BTW) and whatnot.
I do suspect that some of the confetti money will live on past 9/30. I recall reading a recent article in the local paper that the board of commissioners had some leftover CARES act money from a fund for supporting tourism in the County I live in. Mind you, this is in a suburban county that other than the Atlanta Braves stadium and a Six Flags Park, has no significant tourist attractions.
https://www.mdjonline.com/news/local/cobb-to-reallocate-1-7m-in-unspent-arpa-cash/article_3a6cdbce-1233-11ef-a7f5-571b482950b3.html
The article is confusing as to what the money can be spent on now, other a vague statement about “employee retention.” Looks to me like shell games are being played; why not return that unspent money to the US treasury? Because no politician ever turns down free money from the Feds.
I think this is a tacit admission of defeat from the Fed both on inflation and on unemployment. When they initially raised the rates, Powell commented that they will need to push unemployment into the 6-8% territory to crush the demand enough to tame the inflation. Here we are two years later, the unemployment rate is just above 4% and inflation is stubbornly sticking around.
The message is that not only is Fed unable to control inflation using monetary instruments, it’s not even able to raise unemployment and crush the demand side. I think we are entering an era where the Fed is largely irrelevant on the macroeconomic scale. Yes, Fed rates will affect the market by controlling the cost of lending, etc. but we are past days where central banks were able to impose its will on the economy as a whole.
“I think we are entering an era where the Fed is largely irrelevant on the macroeconomic scale. Yes, Fed rates will affect the market by controlling the cost of lending, etc. but we are past days where central banks were able to impose its will on the economy as a whole.”
The term I have heard used for this condition is fiscal dominance, perhaps coined by Lyn Alden.
That is a good point. I too expected the Fed to have to kill the economy stone cold dead to wring out the current inflation, since it even now is still significantly due to supply chain problems. And that is going to rear its head again in a big ugly way if the east coast port strike happens, since the Dems won’t use the Federal authority to shut it down because election.
And workers still exercising their bargaining power.
The inflation will still be compounding to immediately eat away any gains.
It will be handled this way as long as the Fed and friends can pass out ultra-low interest rate loans to each other based on fantasy finance assets for collateral. Inflation doesn’t matter to those close to the printing press.
They can do this over and over again…
Can the explanation be as simple as the interest rate is too restrictive (int rate minus inflation rate) and the fed decided to make it less restrictive? 50 instead of 25 because the fed is late?
Occam’s razor means getting of fluff. Past experience with the same gang is the best indicator of future or current behavior.
These people have senate confirmed jobs. They aren’t following an econ 102 textbooks advice.
As if the econ textbooks reflect reality. It’s clearly Junk Economics
So, Mortimer and Randolph aren’t making as much money as they wanted to this quarter, so ‘turn the machines back on!’ and the Fed did.
As Michael Hudson has said for years: all economies are planned. And as mentioned, in the US, it is Wall St. that plans it, the public have no say. Of course, the private TBTF financial institutions are not accountable to the public, the oligarchy makes policy. As of 2008, they are formally above the law, as are many mega-oligopoly/monopolies who wield market power and can legally bribe politicians to do their bidding. Any laws on the books that have not been “de-regulated” are simply ignored. The media is either blissfully ignorant, or are told to focus on sensational nonsense to entertain and distract, not inform.
At this stage in the historical cycle: the US public has no choice, there is no functioning democracy. When the USAG announces on national television that, what Bill Black called the largest financial crimes in US history, by orders of magnitude, were not going to even be investigated, that should have sent a clear message: the rule of law is used selectively, and corruption is institutionalized in high places.
Then a few years later, we had the Citizens United decision by SCOTUS, that formalized political bribery and money as political speech etc. That decision alone, makes a mockery of any basic principle of “democracy” (which means different things to different people)
Sadly, most people forgot all that, and still hold dear the basic assumptions that there is accountability, the rule of law is applied equally, and that the US has meaningful democratic choice.
However, it seems obvious that we have no democracy, no free market, no accountability.
Although it sounds pedantic and boring, we need to clean up the institutional rot before we can make any collective progress in gaining accountability and democratic legitimacy.
Excellent comment.
File under: banana republic.
who would even pay attention to GDP these days? its irreverent. its simply measures the increase in wealth for the top 1/3rd or less of the country.
it has no basis, or very little basis in real wealth, which is production, just paper manipulation.
as the last great investment in america, the early 1990’s highway bill that pumped real investment in production petered out by the end of the bill clinton reign of terror, the country entered bill clintons policies of austerity, free trade and deregulation that drove the country into a long depression which intensifies every year, with no end in sight.
cheap money only helps those at the top, which is gasoline pouring on a bonfire.
I assume the Fed is a totally different creature today than it was in 1913. Because money was different. It was on a gold standard. When the monetary floodgates were opened in the 20s to stimulate the economy and grow ourselves out of the debt caused by (duh) the First World War it overwhelmed the gold standard. Like breaking an arbitrary monetary sound barrier. And the Fed was unable to get the country back on track. Ironic in that it was created to stabilize the booms and busts of the growing industrial economy. Then as now Congress controls fiscal policy (god help us) which in turn guides monetary policy. And FDR managed to introduce some socially beneficial policies, but it took the Second World War to drag us out of the depression. One war throws us into a depression, another war drags us out. I think we don’t know what we are doing anymore. Our basic values seem to be confused and conflicted. Everyone hates fiat even though it is the best tool we have ever invented. But still, even though we are no longer on the gold standard, poverty is exploding. It’s delusional to hang on every word the Fed mutters because only good fiscal policy can put us on the right track. And ultimately keep the dollar steady. What else is there? Genocide?
Please do not Make Shit Up. Your comment is completely incorrect.I take umbrage at having to spend time I should be spending on new posts correcting reader comments.
From Foundation for Economic Eduction, which is a pretty hard core orthodox monetary organization:
https://fee.org/articles/money-in-the-1920s-and-1930s/
I know you are an established commentor, so I do not like having to come down on you. But nearly all of your recent comments have been highly problematic, but I did not have the time to correct them due to fundraiser time pressures. I am not approving further comments of yours that 1. make big assertions and lack links to substantiate them or 2. would require me to issue a debunking were I to approve them.
I really do apologize. Thought I was saying something that is generally accepted. I’ve read a few books saying much the same stuff I just submitted. I’m not trying to be your headache, but it is almost worth it to get your detailed response. I seriously do not want to be a pain in the neck. I’ll try to do a better job of self censoring.
>>>with the Biden Administration running large fiscal deficits
FY 2024’s 6% of GDP federal budget deficit is not merely “large” it’s an aberration when the economy is at full employment—6% is severe recession or wartime levels. (I’m generally sympathetic to MMT and certainly not an austerity hawk)
And regardless of who wins in November that deficit will remain.
If we ever get a bad roll of the economic dice, It’s conceivable that we’ll get both a deflationary crash (debt destruction/unwind via a recession) and than an inflationary train wreck as the Fed re-opens ZIRP and the US government spends/slashes taxes—all without the People’s Bank of China sanitizing US spending via Chinese purchases of US Treasuries.
the next 8 years might be wild.
Um, U6 is at 8% when it was below 7% for most months in 2022 and 2023: https://ycharts.com/indicators/us_u_6_unemployment_rate_unadjusted
Labor force participation has still not gotten back to pre-Covid levels, much the less the even higher levels earlier in the decade: https://fred.stlouisfed.org/series/CIVPART
Admittedly no one has come up with a quick and dirty way to correct various key employment metrics for Covid disabilities….
So I beg to differ with “full employment” even though I do agree the deficits are way way too big for anything other than a pretty bad recession.
Re the deficit spending: I am always curious where all the deficit money goes. Besides the official budget, there are numerous appropriations bills that Congress uses to spend more. Prof. Hudson says that in general most of the deficit is spent on military and related activities. As for money that does not end up abroad, where does that end up? Does the average person benefit, or does it end up in the hands of the proverbial .01%? A quick and dirty reaction tells me the latter benefits disproportionately
for anyone who likes charts….
total nominal US credit divided by nominal US GDP. If this was a chart of China, pundits would be screaming that China is becoming zombie 1990 Japan.
https://fred.stlouisfed.org/graph/?g=1ubM9
Hidden in the noise the night of the rate cut was the data point that housing units under construction in the US were 10% below their peak level this expansion, this is a known Fed trigger, especially now that the US economy is getting ever more like the other 5 eyes countries . Also real retail sales have been stuck for nearly 3 years
Starting to look like a 2001-2003 slowdown profile, it just depends on whether everyone is bailed out again, or some losses are allowed. A little manipulation of the GDP deflator can make mild stagflation look better than it is.
I’m thinking that the Fed is panicking over the collapse in commercial real-estate.
Remember, in CRE, you cannot just sit on an underwater property and make payments, because every 5 years you have a balloon payment and need to refinance.
The Fed cannot fix insolvency. If a property no longer can get enough tenants, a rate cut won’t solve that.
But the Fed thinks that it can.
On office building conversions to residential:
What makes the typical convertible office building is that it was built prior to the complete submission to air-conditioning. Buildings from that era assumed that sun and wind during the working day were primary light and ventilation. This design criteria necessitated relatively shallow floor plates and operable windows, neither of which exist much at all in post war buildings.
Current codes for high-rise residences require what was standard practice for these older office buildings with regards to light and air. The result is lease spans deeper than 30′ are lost floor space when making a residential conversion, but have to be traversed to get to service cores and elevators, so buildings can’t just be hollowed out, though you do see some of that. Post war buildings all have fixed windows and very deep floor plates meaning large percentages of the building cannot be re-used with a residential program.
In New York, at least, those that have been converted are pretty much the ones that can be converted. So still a lot of real estate looking for a viable urban use.
That’s not correct. Lexington Avenue in Midtown became a rental wasteland only after Covid and it is full of pre-war office buildings.
I readily concede, I overstated my case.
The Lexington Avenue district you mention is indeed full of suitable pre-war buildings that remained in demand due to location until Covid. The original GE headquarters there would make a spectacular apartment building.
Murray Hill has some opportunities too, no doubt there are others. But the bulky post war buildings all around the city are not viable to convert and in lower Manhattan all the likely conversions are done. I fell victim to the provenciality of New York: 80 Pine is where I work and the downtown conversions all started 15 years ago.
The USA will pay over a trillion dollar on the interest on their debt next year. Dont this mean that they need collect more tax to pay the interest and we all know how democrats and republicans hate to increase tax on the wealthy. I just don’t understand how long neoliberals can run the economy on debt when they don’t believe in debt forgiveness.
The US (Treasury/Fed) actually “make” money by spending it: their spending it calls it into existence.
They can create whatever money they need to pay interest on the debts they create by selling bonds, which they do as an excuse to give more money to rich people. The individuals involved are all rich people, so that seems like a good idea.
The Neoliberal end game is someone owning everything and everyone else either enslaved, or just dieing quietly.
13 week Treasury is falling off a cliff.
It’s now down 75 basis points from 3 months ago. 25 basis points since the Fed did their 50 basis point cut. Elevator going down.
The Fed’s dot plot did indicate that they were going to cut a few more times sometime later this year, but longer rates including mortgage’s have moved UP, https://wolfstreet.com/2024/09/21/the-yield-curve-before-and-after-the-rate-cut-short-term-yields-fell-but-longer-term-yields-rose-perhaps-on-inflation-concerns-as-monetary-policy-loosens-in-a-decent-economy/
I think the really interesting question would be : what happens if the slowdown in inflation is temporary? A stagflation would be the worst outcome of all, I would think. https://wolfstreet.com/2024/09/23/days-after-rate-cut-sps-flash-pmi-sees-rising-inflation-and-exhorts-the-fed-to-move-cautiously-with-further-rate-cuts/
When domestic motives seem inadequate to justify a Fed move, one might want to consider international motives.
The Fed’s rate cut may have provided some leeway to Europe and China, for instance.