Quick story: In 2007, I attended a breakfast meeting hosted by Dr. Gregory Mankiw, a Professor of Economics at Harvard.
Dr. Mankiw has written volumes on economics. One of his recurring themes is "expectations." It was part of his talk that morning.
Dr. Mankiw said to the room, paraphrased: The Federal Reserve doesn't have to raise or lower rates to affect change in the U.S. economy. Instead, it only has to talk about raising or lowering rates.
He explained that a mere mention of a Fed Funds Rate change, for what it signals about the Fed's economic projections, is often enough to make Wall Street shift bets and businesses change course.
To Dr. Mankiw, the Fed's words are stronger than its actions.
I believe it because I see it play out repeatedly.
The latest example of Mankiw's theory: In November last year, a Federal Reserve meeting marked the start of a 10-week mortgage market rally that dropped mortgage rates faster than during any rally of the previous fifteen years.
But, the Fed hadn't changed the Fed Funds Rate that day. It only said: We're thinking we might reduce rates sometime soon.
It was enough to drop rates by 1.5 percentage points.
So, the Federal Reserve meets again this week. It's the first of 8 scheduled meetings this year. The Fed won't change its interest rate. Probably. But that's not what I'm paying attention to. I don't care if the Fed changes rates.
What I care about is what the Fed says.
What's Your Biggest Question?
If you had one question about owning a home in the next 12 months, what would it be? Hit reply and let me know.
Happy Homebuying!
|
