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Mortgage rates have skyrocketed, and taken the housing market with it.
That’s seen in a range of indicators, such as the 37% drop in existing home sales from a year ago as reported by the National Association of Realtors, and the 42% slide in mortgage applications to buy, as reported by the Mortgage Bankers Association. Rising rates also impact personal loans, car loans and credit cards.
But there’s one measure that is not picking up this pain: the Fed’s measure of financial conditions.
Joe Lavorgna, the chief U.S. economist at SMBC Nikko Securities, plotted the Chicago Fed’s financial conditions index versus one he made, of the effective borrowing rate for households.
While it’s not clear the Fed pays attention to this particular measure of financial conditions, policymakers are clearly considering something like the Chicago Fed index. The minutes from the last Federal Open Market Committee meeting ending Feb. 1 said “several” participants noted an easing of financial conditions.
“Participants observed that financial conditions remained much tighter than in early 2022. However, several participants observed that some measures of financial conditions had eased over the past few months,” they say.
Lavorgna, a veteran Wall Street economist and a former chief economist for the White House National Economic Council, fears a policy mistake because of this.
“In general, the longer household borrowing rates remain high—and they are likely to go up more with further Fed hikes—the greater the likelihood we see a capitulation in consumption. It would be prudent for Fed policymakers to scrap ‘traditional’ measures of financial conditions, such as the Chicago NFCI, because they do not accurately capture what is going on in the real economy,” he said.
“Sadly, there is nothing to suggest this is going to happen, at least not until the unemployment rate begins to move sharply higher.”
The yield on the policy sensitive 2-year Treasury
TMUBMUSD02Y,
on Wednesday reached the highest since June 14, 2007.
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