The Wall Street Journal and the Financial Times both go page one with apparent leaks from the Federal Reserve that the markets’ expectations of future rate increases are too aggressive and that the central bank thinks the financial system is still wobbly.
The FT says “senior Fed officials” think they won’t hike rates nearly as quickly as markets think they will, largely because they think they’ve got inflation relatively under control. The Journal writes that futures markets are pricing in a 90 percent probability that the Fed will raise rates in August.
An August rate hike can’t be ruled out. Between now and then, a raft of economic data, including two employment reports and several gauges of inflation, will be released. If the overall economy and the financial system show signs of rapid improvement or the inflation news worsens significantly, the Fed may decide to start reversing some of the rate cuts that began last September.
It appears the Fed is reacting to the run-up in interest rates over the last several weeks, something that could exacerbate the housing bust by making adjustable-rate mortgage reset payments higher and could slow the economy further at an exceedingly fragile time. Basically, either the markets are being too optimistic about their expectations for the economy, the Fed is being too optimistic about its expectations for inflation, or both. The “both” answer is the one to really fear, as it would signal stagflation has arrived in earnest.
The Journal implies that the market misinterpreted a speech by chairman Ben Bernanke last week that seemed to be hawkish on inflation, and now the Fed is walking that back a bit. It quotes an analyst saying monetary easing doesn’t usually stop until the unemployment rates peaks. Not many think that’s happened yet.
Meanwhile, The New York Times apparently missed out on the leak, but writes on A15 that Bernanke suggested yesterday that the Senate should convene an independent panel to help it navigate the health-care system in its bid to rein in ever-rising costs.
More evidence that KBR ripped us off in Iraq
The NYT says on page one that an Army official who oversaw the Pentagon’s multi-billion dollar contract with KBR says he was fired in 2004 for not approving shady charges by the Houston company.
The ex-official, Charles M. Smith, said KBR couldn’t explain or document more than $1 billion it was charging the government and he denied payment and was “suddenly replaced.” KBR, of course, was called Kellogg, Brown and Root until last year and was a unit of Halliburton, where Dick Cheney worked before he waddled into the White House.
This couple of paragraphs shows pretty succinctly how the military contractors can have the government over a barrel, even without the aid of their impeccable political connections.
Army officials denied that Mr. Smith had been removed because of the dispute, but confirmed that they had reversed his decision, arguing that blocking the payments to KBR would have eroded basic services to troops. They said that KBR had warned that if it was not paid, it would reduce payments to subcontractors, which in turn would cut back on services.
“You have to understand the circumstances at the time,” said Jeffrey P. Parsons, executive director of the Army Contracting Command. “We could not let operational support suffer because of some other things.”
KBR has raked in $20 billion from its Pentagon contract, the Times says, and just got part of a decade-long, $150 billion deal.
Europe has us “covered”
In housing news, the Journal on A3 says the Bush administration is looking to Europe for financing methods to “jump-start” the housing market. In focus are something called “covered bonds,” which are a $2.75 trillion market in Europe.
The paper says the bonds are mortgage-backed securities (cue horror music), but differ dramatically from the stuff that fueled the bubble. Unlike those, covered bonds aren’t sold off of a bank’s balance sheet and they’re backed by high-quality mortgages and the bank itself, should those mortgages falter. The Journal says they’ve been used for centuries in Europe.
The WSJ on A3 says the so-called Hope Now coalition of mortgage companies will speed up their program to help borrowers stay afloat. Somehow we’re skeptical.
White flight back to the cities?
Meanwhile, home prices in Southern California fell 27 percent in May from a year ago, the Los Angeles Times reports. Putting that in dollar terms helps understand how bad this is: the median home price hit $370,000, down from $505,000 last May.