Sunday, September 24, 2006

Still Asking: Smooth or Crash?

While a slowdown in economic growth, contained inflation and a feather-pillow "soft landing" is what the Fed had in mind for the economy - history shows that economic "soft landings" are exceedingly rare, and that the Fed almost always hikes rates too far in their tightening cycles. Last week's news sure raised some eyebrows on this account - so let's take a closer look.

First the Producer Price Index - which shows if costs are increasing for those producing the goods we buy - came in showing costs had not increased last month, but actually decreased! Quite a surprise, although some of the decline was due to lower oil prices...but still good news, as producers have fewer reason to pass on higher costs to us consumers.

Next, the Fed for the second straight meeting, opted to stay in a "paused" position, and commented that while economic growth is moderating, some inflation risks remain. Fine - no real surprises there, as the Fed tends to not want to shock or upset the market via their prepared commentary. But then along came Friday's somewhat dramatic Philly Fed manufacturing report, showing a very major slowdown in the manufacturing sector. Many economists are wondering, "Did the steam leave the economy?" The cool financial news of the week helped Bond prices improve, and brought about .125% of improvement to home loan rates.

And now while a nice orderly slowdown that feels like a cool breeze is what the Fed desired with their string of seventeen rate hikes, concerns are now mounting about the severity of the slowdown. The Fed has had a history of always going too far, not being patient enough and sending the economy into recession. It will be interesting to see how things play out going forward, and next weeks reports will be especially important...

My business is seeing an increase in sales and new clients since September 1st. Some of the other seasoned agents are seeing this as well in my office. I still feel if the investment is for more than a few years, now is a great time to be buying in the city.

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