Federal Reserve Chairman Ben Bernanke will deliver a critical speech Friday in Jackson Hole, Wyo., at the Federal Reserve Bank of Kansas City Economic Symposium. The speech is tentatively entitled, "Near- and Long-Term Prospects for the U.S. Economy."
Domestic and global financial markets will be tuned to every word, every nuance, as to what types of new monetary stimulus, if any, will be considered by the Fed in coming weeks and months to help a lackluster U.S. economy. In the interim, a review of current inflation pressures and interest rates seems timely.
The most familiar of consumer inflation measures rose a disturbing 0.5 percent in July, exceeding forecasts. Such prices are up 3.6 percent during the past 12 months, exceeding the 2.3 percent rise in average hourly earnings for all employees on private nonfarm payrolls.
No surprise here: higher energy costs led the way, with overall energy costs rising 19 percent during the past 12 months. Expectations that sluggish domestic and global economic growth could lead energy prices even lower than what has developed in recent weeks helps sooth some of the inflation anxiety in financial markets.
Food costs rose an estimated 4.2 percent during the past year. Apparel costs rose an estimated 3.1 percent, with the entire rise occurring within the past three months. The finger of blame here is focused on cotton prices, which hit a record high earlier this year. The weak U.S. dollar hasn't exactly helped either.
The "core" measure of consumer inflation (which excludes volatile food and energy costs) rose 1.8 percent during the past 12 months. This measure is within the Fed's perceived long-term "core" target range of 1.5 percent -2 percent annually. At the same time, the 1.8 percent core rise is three times what it was as recently as last October.
Most forecasters, including the Fed, expect consumer inflation pressures to moderate in coming months as economic growth most everywhere seems to be slowing. Should inflation pressures not moderate, any new stimulus from the Fed would be limited.
The Producer Price Index (PPI), a key measure of wholesale inflation, rose 0.2 percent in July, in line with forecasts. The PPI is best described as an index that reflects price changes in various categories of goods before they reach the consumer. Exciting categories of crude, intermediate and finished prices for food, energy and "core" materials likely appeal only to the most die-hard (dare I say "geeky?") economist.
Two items were of concern within the index. Prices of finished goods were up a worrisome 7.2 percent during the most recent 12-month period. In addition, "core" wholesale inflation was up 0.4 percent in July, the largest rise in six months. The rise of 2.5 percent during the past 12 months was the most since June 2009.
Despite these increases, weak domestic and global economic growth is likely to keep oil and energy prices under control. Oil remaining in the "mid $70s to mid $80s" would help lead producer prices lower in coming months. A likely return of Libyan oil production will also help.
Record low U.S. Treasury rates, and the flight to quality
Standard & Poor's downgrade of the quality of U.S. debt last Aug. 5 in theory would lead essentially all U.S. interest rates just slightly higher than had no downgrade occurred. However, theory was trumped by real-world anxiety since early August.
An increasingly scary European debt situation — and European government leaders who are constantly shortchanging what needs to be done — have been the primary contributors to painful stock market weakness around the globe and in the U.S. A rising view that European financial anxiety could lead the U.S. back into recession has not exactly helped.
Scared money leaves equity markets (stocks) in droves. It must go somewhere safe. It must go somewhere it is liquid (easily marketable at good prices). It must go to another financial market large enough to meet the needs of tens of thousands of investors handling hundreds of billions in dollars and other currencies.
For your consideration, I offer the U.S. Bond Market. Investors know the one and only place to "park" enormous amounts of scared money is the American bond market — the largest, deepest and most secure in the world. The dramatic flow of scared money is known as "the flight to quality."
Enormous flows of funds have pushed bond prices sharply higher, with corresponding interest returns (yields) dropping to near all-time lows. The 10-year U.S. Treasury note yield, in the low 3's just a few weeks ago, is now pushing up (or is it down?) against a 2 percent return (it actually traded as low as 1.99 percent a few days ago).
It is this rate to which most new 30-year fixed-rate mortgages are adjusted. Should this rate stay near current levels, already incredibly low mortgage interest rates could go even lower — with 30-year fixed-rate mortgages starting with a "3"!
Record low mortgage interest rates
For those homeowners who have the ability to refinance a mortgage, and for those looking to purchase and finance a new or foreclosed home, have lenders got a deal for you!
Mortgage interest rates last week were their lowest in nearly 50 years! Thirty-year fixed-rate mortgages for conventional loans averaged 4.15 percent, down from 4.32 percent the prior week. Fifteen-year fixed-rate mortgages were also in record low territory, averaging 3.36 percent, down from 3.50 percent the prior week.
Yes, mortgage loans can be more difficult to get than they were five or 10 years ago. Yes, there are fewer mortgage lenders out there than five years ago, when they seemingly replaced gas stations on every corner.
Yes, the required documentation is greater in most cases and the time from start to finish is likely longer. Yes, home prices are still declining modestly in most markets around the country. And yes, the U.S. government's latest venture into driving lenders crazy, the 2,300-page Dodd-Frank Wall Street Reform and Consumer Protection Act, has muddied the lending process more than ever before.
Small banks and other smaller lenders are collectively "pulling their hair out," trying to understand what is in this latest regulatory monstrosity. The phrase "we're from the federal government and we're here to help you" raises its ugly head again!
Bottom line: if your ducks line up financially; if you have a savvy lender; if your home is now largely maintaining its value, or the new or foreclosed property being considered has largely bottomed out — the timing for refinance (or a new purchase) is impeccable!
Jeff Thredgold is the chief economist for Zions Bank and founder of Thredgold Economic Associates, a professional speaking and economic consulting firm. Visit www.thredgold.com.