Below is the second HPS Insight Weekly Housing Research Note.
THE EXPECTED AND UNEXPECTED FOMC ANNOUNCEMENTS
Last Wednesday, the Federal Open Market Committee (FOMC) announced two new policy initiatives, one expected and one unexpected. Expected was the Committee’s decision to purchase longer-term Treasury securities at a pace of $45 billion a month. As we noted last week, the end of Operation Twist and low growth forecasts made additional stimulative measures likely. Unexpected was the Committee’s decision to maintain the Fed Funds rate between 0 and 0.25 percent as long as 1) the unemployment rate remains above 6.5 percent; 2) inflation projections over a one to two year time horizon remains below 2.5 percent; and 3) long-term inflation expectations continue to be well-anchored. These quantitative thresholds are a shift away from communicating that rates would remain low for an extended period of time. So what is the thinking that led to these two policy initiatives?
If tax reform is a “Fiscal Cliff” goal, let’s return to the ’90s.
This morning I joined Becky Quick in Washington, DC for CNBC’s “Squawk Box”and noted in my view that there are benefits to allowing my favored Bush income tax rates to expire and return to Clinton-era tax rates for everyone.
Don’t get me wrong: returning to the higher Clinton income tax rates isn’t ideal policy – it would certainly dampen economic activity, but those income tax rates alone would not be the calamity many Republicans, Democrats, and commentators now fear. In fact, they even have some benefits.
Here are my reasons for returning to Clinton-era tax rates:
1) The Obama plan of only raising the top two rates on the wealthiest Americans kills any chance of income tax reform. This is important to understand: tax reform was always going to be a long shot. The forces arrayed against reform are numerous, well-organized, well-financed,
FED MBS HOLDINGS ARE REDUCING RATES BUT TRANSMISSION EFFECT VERY REAL
The biggest housing-related news came early this week when William Dudley, President of the Federal Reserve of New York, gave a speech summarizing a paper by New York Fed staff titled “The Rising Gap Between Primary and Secondary Mortgage Rates.” Dudley said the Fed’s decision in September to purchase an additional $40 billion a month of agency mortgage-backed securities (MBS) is a sign that “Quantitative Easing” is working; current MBS yields declined roughly 45 basis points while the Freddie Mac 30-year rate declined 23 basis points. However, there are impediments to current policy: the yield that the Fed is receiving in the primary market is significantly lower than actual mortgage rates available to the consumer (Exhibit 1).
Historically, the spread hovered between 30 and 50 basis points. In September, it rose above 150 basis points. There are several reasons cited for this anomaly. Outside of the actual paper, Nick Timiraos of the Wall Street Journal provides what …
By Matt McDonald and Russ Grote, (202)-822-1205, mmcdonald@hamiltonps.com
Balance is in the eye of the beholder. In the case of the fiscal cliff, the President has focused his argument for balance on the need for higher taxes on the wealthy in addition to spending cuts. But it is equally true that no deal will be balanced if entitlement reform is not a part of it.
Without entitlement reform, no deal will be balanced in the long-run and the U.S. will careen from one “Grand Bargain” to another over a period of years.
For Republicans, this means negotiating from a higher tax base the next time we need a “Grand Bargain.” Essentially, if Republicans give in on tax rates without entitlement cuts today, they will cede a larger government without really solving fundamental long-term problems.
Rather than complicating negotiations, acknowledging the centrality of entitlement reform for “balance” can open up potential compromises that fall along current messages from both parties. Additionally, compromise on long-run issues could create the necessary political space to maintain or even increase …
