Powell Prepares His Sermon On The Wyoming Mountains

Reality bites. And at a decidedly inconvenient time for Federal Reserve Board chairman Jay Powell. In a little more than a month he will be meeting with his international peers at their annual meeting in Jackson Hole, Wyoming. He must decide whether to compete for the Banality-of-the-Year Award by repeating that the Fed will continue to buy $40 billion of mortgage-backed securities in addition to $80 billion of Treasuries every month, full stop. Alternatively, he can admit what the recently released minutes of the last meeting of his monetary policy team reveal – many of his colleagues worry that the housing market is overheated, and threatens to abort the economic recovery now in full swing. And add that he is willing to tighten policy early in 2022 by tapering monthly purchases of mortgage-backed securities and, perhaps, Treasuries, risking a “taper tantrum” by investors and a market collapse.

In the background is a fundamental change in Fed policy. He is aiming at an “inclusive” recovery, one in which black and Hispanic groups “continue to get supported” even if the overall unemployment is as low as it can go. That might make red-hot his favourite temperature, and tilt him towards continuing QE purchases at current monthly levels.

The Housing Market Is Too Darn Hot

That the housing market is beyond robust there is no question. Buyers have learned that meeting the full asking price is often the opening shot in an ensuing bidding war. The median price of existing homes rose last month by 23.56% from a year earlier, to a record $350,300. Prices for new houses jumped 18.1% to an average of $374,400. Americans are awash in cash, with the saving rate at 24.7% compared with 8.3% in February 2020, just before we realized that China had exported Covid. That “ample dry powder” says Well Fargo’s Tim Quinlan is enough to have a big impact on consumer spending “over the next couple years”. Bank of America’s CEO Brian Moynihan reckoned that 70% of the money consumers received from stimulus measures had yet to be spent by mid-June. No surprise that consumer confidence has risen for five consecutive months to the highest level since the onset of the pandemic.

Work-From-Home Means Fewer Cubicles, More Dens

Two important trends are buoying demand and prices: a change in the labor market, and massive intergenerational wealth transfers. The first is the ripple effect of a change in the labor market. Wall Street tough guys have made headlines by ordering their staffs back to the office. CEO of JPMorgan Chase Jamie Dimon, “people don’t like commuting, so what.” James Gorman, CEO of Morgan Stanley, “If you can go to a restaurant in New York City, you can come into the office.” Goldman Sachs’ boss David Solomon, “be in a position to return to the office” by July 14. BofA’s Moynihan expects all of its vaccinated employees back at their desks after Labor Day, and is working out procedures to deal with the rest of its staff.

Macho Wall Street bankers, who set such high store by the positive effect of water-cooler talk on creativity that they are willing to lose workers to more flexible employers offering hybrid work schedules, are paying starting salaries of $100,000 to attract those who prefer cash to comfort. These investment bankers are not typical of all employers, many of whom are willing to accede to workers who want to continue working from home, full- or part-time. This has resulted in a shift of work space from commercial buildings to homes and apartments. As office vacancy rates soar – in New York City to 18.7%, double pre-pandemic levels – builders are adding space to residences for the work-from-home crowd. Dens, special work spaces and generally larger apartments and homes are features of newly built facilities.

ParentBanks Ready to Help

The second important change is the greatest intergenerational wealth transfer in modern memory. Americans aged 70 and older are sitting on almost $35 trillion, 27% of all US wealth and 157% of the nation’s GDP. For children in need of the down payment on a home, or the cash demanded by many sellers, this means ParentBank, Inc. is well capitalized, with many branches eager to see children off to their own homes. For those who need mortgages, kindly old Powell has kept interest rates on 30-year mortgages at around 3%.

Thinking About Tapering

Super-high savings, a shift in demand from commercial to residential space, parents with ready cash to help with down payments or cash purchases, and the Fed repressing interest rates, result in prices rising at record levels that spell boom-and-bust to several Fed policymakers. Rising housing costs, meters on gasoline pumps spinning at alarming rates as prices jump 44% this year, food prices rising fast enough to prompt supermarkets to stock up before the next increase – unmoored inflationary expectations in Fedspeak – leave Powell little choice but to use the Wyoming meeting to announce that the Fed plans to begin a slowdown in asset purchases – a taper in the language of the trade – sometime early next year.

Some 60% of economists polled by Reuters are expecting the taper to begin in the first quarter of 2022. The open question is whether to ease up only on purchases of mortgage-backed securities to calm the housing market, widely believed to be the incubator of the financial disease that precipitated the 2007-2008 financial collapse, or also back off on Treasuries. 

Powell Eyes Linked In

The Fed chairman, whose term expires in February, would be less than human if it did not at least fleetingly cross his mind that announcement of plans to cool the economy next year, at a time when the 2022 congressional election campaign is heating up, might affect his chances of reappointment. Much will depend on whether Janet Yellen, who says Powell is good to work with, or the residents of the Democrats’ left, for whom inflation holds no terrors, and diversity is important, speak with the President immediately before he announces his decision.