It’s been seven years since policymakers started using the term “transitory” to describe the period of low interest rates that we are still experiencing.  Rates have been held low in part because inflation remains near zero.  This morning, Personal Consumption Expenditures dropped again to a 1.3% increase.  That means that we are only spending 1.3% more for our personal effects this year than last year.  While personally I think it’s great that my paycheck doesn’t feel quite as tightly stretched to cover costs of living, others feel that we need to be seeing a 2-3% annual increase in the price of goods and services to maintain a healthy economy. Those expositions are coming from the very body that regulates interest rates, but perhaps that argument is fundamentally flawed, given the advances made in the sectors that make all that stuff.

Attempting to figure out the future of our evolving world economy, there is a hypothesis which argues that technology has driven down, and will continue to drive down the cost of goods and services.  The price increases that we have experienced in the past are irrelevant moving forward because the way we make and consume things has changed. It has been estimated that 38% of American Jobs are at high risk of being replaced by robots (or other artificial intelligence) over the next 15 years.  Robots currently account for about 10% of all tasks performed in the manufacturing sector.  That number is anticipated to rise to 25% in the next eight years alone.  Increased automation of course has its advantages, one of them being a productivity gain of 32% in the last 14 years.  That expansion of output has brought more goods and services to the market, which means more supply, which drives down prices.  And while I love getting good quality stuff at a great price, I also recognize that without a job, I can’t buy anything.
               

This last Monday, Cubs shortstop Addison Russell dove into the Cardinals fans on the third baseline to catch a fly ball.  What he caught is an armful of melted cheddar and jalapenos.  And the jolted fan caught the nickname of “Nacho Man” as his enormous plate from the concessions stand toppled onto the field.  Between innings, Russell replenished Nacho Man’s goodies, gave him the game ball, and they snapped a selfie.  Nacho Man snagged another game ball an inning later and tossed it to some kids a couple rows up from himself.  The Cubs went on to win the game, clinching the NLC Division–which means they are heading to the playoffs.  Nacho Man left the stadium with a big smile on his face even though his Cards lost 2-10.

Not all of us win in our division, but all of us occasionally get our fresh, towering nachos toppled into the dirt.  Notoriety aside, where Nacho Man becomes a hero in my eyes is by giving that second ball away.  He admittedly went to the park that night “to catch fly balls”, and once he got his, he passed the next one on to some kids to whom it will mean a lot more.  I think that we have that opportunity on a regular basis in our industry to share our resources with others that need it.  I love giving credits at closing when it matters.  I love hooking people up with some movers on my dime.  I even don’t mind eating appraisals when buyers back out of the transaction.  I want to be like you, Nacho Man–except I root for the Cubs.

And just like that, leaves are blowing across my browning lawn and I am hastily pulling a sweater over my shivering frame.  What just happened?

You know who else is wondering what happened?  The folks at Gatorade.  They made a video game that had the protagonist shun water in favor of their electrolyte and sugar filled beverage.  Evidently Water felt slighted and made a plea to the State of California.  As is happens, California was still in a drought and wanted to do everything in its power to get back into Water’s good graces.  California’s Attorney General fined Gatorade $300,000 for misrepresenting H2O as being inferior.  Water got a big head over all the attention and went swirling around the Caribbean and washing through the streets in Texas.  Meanwhile, cell phone toting teens are chugging Red Bulls and eating Winchell’s–both headquartered in the Golden State.  In the end it turns out that kids have been taught to conserve water, not drink it.

And that seems like a better story than bombastic bureaucrats and North Korea’s nuclear nonsense–none of which seems to be affecting interest rates one way or the other this week. Stay thirsty my friends.

Today is the last full day of Summer, though it might not feel like it.  But just wait until tomorrow; temperatures are tapering off quite briskly.

Yesterday the Federal Open Market Committee announced that next month they will start tapering off their Bond holdings.  Additionally, 11 of the 16 members are planning on hiking rates before the end of 2017–and that’s a majority vote.  Twelve of the 16 members see three rate hikes during 2018.  That information was enough to push the 10 Year Treasury above its 100 day moving average, making long-term rates more likely to tick upward in the weeks ahead

It’s Fed Day. The markets are flat ahead of the read statement at about 12:15 our time.  Their economic projections (AKA: “dot plot”) will be publicized, as will be the Fed Funds Rate going forward.  The latter is anticipated to remain at 1.25%.  Many economists are expecting the Fed to announce the implementation of the plan laid out earlier this year to sell off the better part of $4.5 trillion in assets (AKA: unwinding QE).  While the markets are anticipating this flood of bonds to hit the market, it’s entirely possible that the ramifications will have hurricane-like destructive effects on interest rates, just as a real hurricane destroys the property of people, even though they know it’s coming.

Puerto Rico’s Governor told residents that their lives are in danger if they don’t evacuate.  I’m telling you that if your mortgage interest rate isn’t locked in and fixed, your financial life is in jeopardy. 

The Federal Open Market Committee starting up today.  It will be the last for current Vice-Chair Stanley Fischer.  He was a former economist at World Bank, and noted teacher at MIT, with illustrious pupils such as former Fed Chair Ben Bernanke and European Central Bank President Mario Draghi.  Mr. Fischer has been a bit of an inflation hawk, warning of the risks of a prolonged low-rate environment.  His vacancy opens up a fourth empty seat at the Fed for President Trump to fill.

Speaking of President Trump, he welcomes Heads of State from across the globe to New York City this week for the United Nations General Assembly.  It will be a great opportunity to be Presidential and unite voices to promulgate peaceful understanding.  Germany, North Korea, and Russia are all absent from the event.

Newly constructed homes represent about 10% of the housing market across the country. This morning’s reading shows a 0.8% drop in Housing Starts, but number of new Building Permits requested rose 5.7% last month.   

The Consumer Price Index rose 0.4% to a year-over-year increase of 1.9%, due in part to a spike in gas prices–which are up 6.3% from January 2017.  Compared to a few years back, of course, it’s still a bargain at the pump.  I think that I’m paying about half of what I was to sink 20 gallons of premium into my SUV back in 2013.  So you won’t hear any complaints from me right now.

In broader terms though, higher oil and gas prices lead to higher costs to produce and distribute goods, and that means inflation.  Moderated inflation is what the Fed is looking for before raising rates again, but I believe that it will take more several months (and many more signs of increasing costs) before the Fed has sufficient argument to make a move of any kind.

After wholesale mortgage pricing hit highs last week not seen in almost a year, it has since fallen back down 50 basis points (that’s 1/2 discount point for the consumer to get the same rate–or 1/2% of the loan amount that the mortgage company fails to earn), and are currently looking to settle in somewhere.

In other wholesale news, the Producer Price Index rose 2.4% last month, up from 1.9% the month before.  That’s 1/2% higher cost for the same process in just one month.  Though the increase is the same, there is no direct correlation between these two tidbits of info, any more than the rising cost of Pringles is associated with wheelchair deaths.  But is still makes for interesting conversation.

Several months ago, the Fed committed to three rate hikes this year and then laid out a timeline to make that happen.  There has been one 1/4% bump so far in 2017.  The chances of the scheduled increase happening in September is now at 0%, and the likelihood of the forecasted rate hike occurring in December is only 26%.  Fed Governors, speaking independently, continue to cite a lack of inflation as the fundamental rationale for letting near-record low interest rates to continue. Sometimes it’s OK to change your mind.

Aside from stagnant growth, other considerations keeping interest rates low include North Korea continuing to test nuclear missiles, the national debt ceiling needing to be increased again, and a string of hurricanes wreaking havoc across the South. Long term mortgage rates are as good as they have been since last November.  

The Japanese are considering scaling back their economic stimulus and giving up the goal to see 2.0% inflation anytime this century.   Our own Fed is also struggling to see the same level of growth in the U.S. economy.  Insight into the minds of the designers of government oversight will be released today at noon our time.  Nobody is on the edge or their seat.  And that’s why the book is beige.