| Greenspan's cheer could push mortgage
Alan Greenspan says the economic slowdown appears
to be over. Treasury yields jumped higher as soon as the words were
out of the Federal Reserve chairman's mouth, and long-term mortgage
rates are likely to follow.
Greenspan's statement Thursday morning before a U.S.
Senate committee marked a change in his opinion about the economy
from last week. On Feb. 27, he spoke to the House of an "anticipated
recovery" and said the business cycle appeared to be "prompting
a firming in economic activity."
On Thursday, just eight days later, Greenspan told
the Senate Banking Committee that the "recent evidence increasingly
suggests that an economic expansion is already well under way."
An economic recovery implies inflation sometime in
the future, and therefore higher interest rates. Traders, prompted
by Greenspan's optimism, caused Treasury yields to shoot up abruptly.
Fixed rates for 15-year and 30-year mortgages tend to move along
with 10-year Treasury yields. So Greenspan's statement to the Senate
was expected to indirectly cause a rise in mortgage rates.
Specifically, the yield on the 10-year Treasury note
rose from 5.05 percent before Greenspan's speech to 5.17 percent
an hour after the speech. That's roughly the same as a one-eighth
of a percent increase in mortgage rates.
The rise in Treasury yields doesn't guarantee
that every mortgage lender will raise rates immediately. But lenders
pay attention to Treasury yields, making it likely that a lot of
them would raise rates in response. About 2 1/2 hours after Greenspan
started speaking, one prominent lender raised some of its 30-year
fixed rates by one-eighth of a percentage point.
Greenspan's speech to the Senate was almost the same
address he gave to the House last week, with a few small, but significant,
changes. On Feb. 27 he said "a subdued recovery beginning soon
would constitute a truly memorable performance" for the economy.
Thursday, he took out the words, "beginning soon."
On Feb. 27 he said the economy "is close to
a turning point," and on Thursday he said the economy "is
moving through a turning point."
Greenspan became more optimistic after seeing the
results of the economic reports of the last week. Auto sales, personal
spending and initial jobless claims posted improved numbers. Most
important was the manufacturing index compiled by the Institute
for Supply Management, which showed the first sign of manufacturing
expansion in 19 months. That's important because last year's recession
was led by a long-term decline in manufacturing. Consumer spending
wasn't affected nearly as much, which made it an unusual recession.
In both speeches, Greenspan declared optimism about
the long-term health of the economy, but said that the recovery
in the near term probably will be sluggish because consumers already
have been spending a lot. Responding to a senator's question Thursday,
he said consumer demand "never went down and so there's little
room to move back up."
The Fed's Open Market Committee, which sets short-term
rate policy, next meets March 19. Right now the overnight lending
rate is 1.75 percent. Futures traders at the Chicago Board of Trade
regard an interest-rate increase unlikely at that meeting. The real
question is whether the Fed will change its bias to reflect a belief
that the economic outlook is balanced. Currently, the committee
says the risks are toward economic weakness.
The Chicago Board of Trade has priced in a 50-percent
chance that the Fed will raise the overnight lending rate to 2 percent
by the beginning of June, and traders believe the overnight will
be 3 percent in December.
The Open Market Committee's next three meetings are
March 19, May 7 and June 25-26."