This reminds me of last year when the Fed's interest rate hike drove the long rate down.
Needless to say it all contradicts the typical classroom interest rate model where you lower rates by lowering the discount rate and raise 'em by raising it.
In effect, "the market" seems to read the presence of some inflation; compensate for it; expect that the Fed will over react, and then overcompensate. So when the Fed ultimately does give an indciation--as in its "tightening bias" statement this week--that it will tighten, the market says, "ah, but inflatojn is really not so bad, the Fed is over-reacting."
And down comes the long rates. Although I note that, having followed this for some time now, the lag betweent he decline in the long bond rate and the decline in the 30 year zero point loan rate is substantial (going down the housing rate will trail by days, sometimes weeks; going up the housing rate will climb in response to long bond rate change sometiems in a matter of hours, which means the people who lock in the morning may lock at a lower rate than the people who lock in the afternoon).
It would be interesting to quantify the following kinds of investor premia built into long prices:
1. The fear that rates will change. 2. The fear that rates will change more than anticipated. 3. The fear that the Fed will alter its policy. 4. The fear that the Fed will alter its policy more than anticipated.
I'll bet this all shaves a point or two off annual GNP...
-- Gregory P. Nowell Associate Professor Department of Political Science, Milne 100 State University of New York 135 Western Ave. Albany, New York 12222
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