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Investors Brace For News Out Of Fed Minutes

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Investors Brace For News Out Of Fed Minutes

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Investors Brace For News Out Of Fed Minutes

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RENEE MONTAGNE, HOST:

China's economy has played a role in what's been a tumultuous month for financial markets around the world. Another major factor: shifting views about what's happening in this country, specifically what the Federal Reserve is going to do and when. That's led to a surge in long-term interest rates, like mortgage rates.

To unravel this, we've got David Wessel on the line. He's economics editor of The Wall Street Journal, and also a frequent guest on this program.

Good morning.

DAVID WESSEL: Good morning, Renee.

MONTAGNE: How much have interest rates moved lately?

WESSEL: Well, they've moved quite a bit. The benchmark rate is the one on 10-year U.S. Treasury notes. That's gone from below 1.7 percent at the beginning of May, to nearly 2.7 percent this week. And that, in turn, has pushed up mortgage rates - as you said - by about a full percentage point. The 30-year fixed rate mortgage is now at about 4.3 percent, according to latest Freddie Mac survey. And that adds about $90 a month to a mortgage of $165,000. So it's not huge, but it's something.

In part, the market's reacting to the signs that the U.S. economy is getting a little stronger, and that brings rates more to normal. And, in part, it's because markets are anticipating the day when the Federal Reserve won't be trying so hard to keep long-term interest rates down.

MONTAGNE: Well, the Federal Reserve has stirred up a lot of anxiety lately. What's that all about?

WESSEL: Yeah. Well, three weeks ago, Fed Chairman Ben Bernanke tried to explain that if and only if the economy kept improving, then the Fed later this year, would reduce the amount of money it's pumping into the economy, and that would tend to keep long-term interest rates going up a little bit. Well, the markets freaked out. As the president of the Atlanta Fed put it, Mr. Bernanke was talking about using a nicotine patch to give up smoking, and the markets reacted as if he were talking about going cold turkey. And it took speeches by half a dozen other Fed officials - and about a dozen more metaphors - to clarify Mr. Bernanke's clarification. And we could go through more of that today.

The Fed the afternoon releases the minutes of last meeting of their policy discussion, and that'll show us how much disagreement there is inside the Fed. That's been a concern lately. And then after that, Mr. Bernanke is going to field questions from academic economists up in Cambridge, Massachusetts, and that'll give him another opportunity to either clarify things or muddy the waters again.

MONTAGNE: OK. So we may learn some more today. But David, despite that clarification that you've just been talking about, long-term interest rates did not go back down to where they had been.

WESSEL: Absolutely not. They've bounced around a bit, but the trend has been distinctly up. The latest data - last Friday's job report, for instance - and the signs that consumers are borrowing a little more have reinforced the notion that the economy is getting stronger, and that that's going to lead the Fed to stop buying bonds, to stop keeping long-term interest rates so low sometime before the end of the year.

MONTAGNE: So which is this: a good sign for the economy or a bad one?

WESSEL: Ah, it's a good question, Renee.

(LAUGHTER)

WESSEL: So, Olivier Blanchard, the chief economist of the International Monetary Fund, said this week that higher rates in the U.S. are a sign that the U.S. economy is getting a little stronger, and that's basically good news. The stock market's bounced back to where it was before Mr. Bernanke's press conference, and that reinforces that notion. But there are going to be some side effects. For one thing, it makes borrowing here much more costly. That makes it more expensive to buy a house, more expensive for businesses to borrow, and that will serve as a break on the economy. So it's a mixed bag.

MONTAGNE: Well, just briefly, will it also be a break on the housing market?

WESSEL: A little bit. But 72 percent of those surveyed by Fannie Mae recently said that it's a good time to buy a house. And 60 percent say they expect home prices and mortgage rates to keep rising. So that may lead some of them to buy now, rather than wait. Now, some banks are still very picky about making mortgages, so it might hurt home sales a little bit. But a surprising number of home sales these days are for cash, people who don't need a mortgage. And so mortgage rates may be just another little factor in the house price recovery.

MONTAGNE: David, thanks very much.

WESSEL: You're welcome.

MONTAGNE: David Wessel is economics editor of The Wall Street Journal.

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