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There were no surprises in today’s FOMC statement:

Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.

The FOMC also issued a note titled Balance Sheet Normalization Principles and Plans.

The Grits latest subsidy effort is attracting some criticism:

The announced housing-affordability plan, which will have Crown agency Canada Mortgage and Housing Corp. provide up to 10-per-cent funding of mortgages for first-time buyers, is a can’t-lose political proposition for a government that hangs its hat on supporting the middle class (and expects that support to be returned at the ballot box).
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The plan will increase demand for homes – that’s precisely what it’s designed to do. The government argues that because CMHC will contribute a bigger incentive for buyers of newly built homes, the plan will also spur increased supply. But while the demand will be essentially immediate, it takes much longer for homes to be built to catch up. It doesn’t take a PhD in economics to figure out that higher demand, in the absence of matching supply, will inflate prices. The help the government is offering new buyers could very quickly be wiped out by rising prices; in markets where prices have been declining, this could undermine the improving affordability that buyers would have seen otherwise. And this isn’t just for first-time buyers – all buyers will feel the impact.

None of this is helpful in addressing Canada’s record-high household debt loads. Instead, it encourages more people at the margins of being able to afford a home to take on mortgage debt, while contributing to the bloated housing costs that got Canadian households into the current debt conundrum in the first place.

Tell me again how this is a good investment?

Yes, I’ve often said that that this country really needs is an increased supply of houses that can’t be sold without a government subsidy. Haven’t we all?

Like so many other idiotic government programmes (such as rent control and subsidized housing), this will have a deleterious effect on the economy due to the restriction of labour mobility. You buy a house for X, assisted by a 10% government subsidy. Ten years later, you get the offer of a slightly better job, but to take it will require moving. Moving means you have to pay back your interest-free loan. So you will have to buy a house that’s not as good as the one you’re in. And after adding up all the pros and cons, you decide to turn down the job and stay put. Hurrah for productivity!

On a brighter note, it appears the CMHC is reducing its impact on mortgage insurance – in 2017 there was 480-billion worth of insurance in force, compared to 557-billion in 2013; the CMHC insured about 31.9% of outstanding Canadian residential mortgages in 2017, compared to 45.6% in 2013.

PerpetualDiscounts now yield 5.57%, equivalent to 7.24% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.75%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 350bp, a slight (and perhaps spurious) narrowing from the 355bp reported on March 13.

This entry was posted on Wednesday, March 20th, 2019 at 8:16 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.