The U.S. Federal Reserve's recent tough talk on inflation served notice to financial markets that the central bank was serious about tamping down price pressures, but it has hit the economy in one of its tenderest spots — housing.
Markets took immediate heed of surprisingly strong comments delivered by Fed Chairman Ben Bernanke and Vice Chairman Donald Kohn on inflation earlier this month and began to judge chances of a rate hike at the Fed's August meeting a near certainty.
But a side effect of this new respect for the central bank's commitment to price stability came in the form of elevated longer-term interest rates, which reflects a steeper than previously expected march up in the overnight borrowing costs that the Fed controls.
These higher long-term rates on Treasury securities have quickly translated to higher rates for fixed-rate mortgages, a drop in mortgage applications and a slide in home loan refinancing that could push the prospect of a strengthening in anemic economic conditions further into the future.
"The Fed's tougher line on inflation has had some benefits in terms of the firmer dollar, and has taken some of the steam out of commodity prices," said Mark Zandi, chief economist for Moody's Economy.com. "But it also has created some problems, the most obvious being...another hit to the already fragile housing market."
Saturday, June 21, 2008
Fed's Anti-Inflation Talk Weakens Housing Market
From Reuters, via CNBC: