Hidden in the FOMC Minutes Are Two Very Large Issues

MBA Mortgage Applications (week ended 4/5/2013)

– Purchase Index – Week/Week  -1.0%.  Previous weeks were +1.0%. +7.0%. -4.0%, -3.0%, +15% and -5%.

– Refinance Index – Week/Week  +6.0%. Previous weeks were -6.0%, +8.0%.,-8.0%, -5.0%, +15% and -3.0%.

– Composite Index – Week/Week  4.5%.  Previous weeks were +4.0%, +7.7%, -7.1%, -4.7%. +14.8% and -3.8%.

The Purchase Index is a leading indicator for Housing market activity and purchase applications have been inconsistent.  Refinance application are driven by rates.  The variation in purchase applications likely has to do with the less attractive terms of FHA loans.

FOMC Minutes

Hidden in the FOMC minutes are two very large issues:  1) the Fed has been buying Treasuries at very low rates and when it decides to reduce its holdings it may well take significant losses.  Instead of contributing tens of billions of dollars to Treasury each year the Fed will be viewed negatively 2) money supply does not function independently from fiscal policy.  The Fed has been purchasing about half of the Treasury Departments deficit recently.  This has enables the cost of servicing the $16.8 trillion debt to stay low.  When rates rise the cost to Treasury (i.e. the taxpayer) will spike up dramatically and folks will ask “What happened.” Politicians will blame the Fed.

Both fiscal and monetary policy are driven by that which achieves short-term benefits with little regard for long-term consequences.