The Unassuming Economist

The IMF’s latest report on the United States says that:

“Housing finance and the U.S. housing market have not been reformed comprehensively. To date, no legislative or executive action has been taken to reduce substantially the footprint of Fannie Mae and Freddie Mac (“Enterprises”). However, as conservator, the Federal Housing Finance Agency (FHFA) has required market-based credit risk transfers from the Enterprises to the private sector at an increasing level since 2013. The Enterprises have also jointly developed a common securitization platform and have announced that they will issue a new uniform mortgage backed security starting June 2019. These Enterprise reforms have been accomplished administratively and have not reformed the entire housing finance system, which would require legislative action.

Since 2015, the FHFA has directed the Enterprises to fund the Housing Trust Fund and Capital Magnet Funds (as required by the 2008 Housing and Economic Recovery Act) by transferring a portion of total new acquisitions to these funds, which are administered by the Department of Housing and Urban Development and Treasury Department, respectively.
FHFA has the discretion to suspend the Enterprise allocations to the affordable housing funds, including the Housing Trust Fund, if the allocations are contributing to the Enterprise’s financial instability. Moreover, the Senior Preferred Stock Purchase Agreements (PSPA’s) are sources of strength for the Enterprises. Indeed, the PSPA’s between the Treasury and each Enterprise both ensure the ability of each Enterprise to meet its financial obligations and to ensure that they will have minimal net worth as all profits above the capital reserve amount are transferred to Treasury each quarter. The capital reserve amount had been declining by $600 million per year and was scheduled to decline to $0 on January 1, 2018. However, on December 21, 2017, FHFA and the Department of the Treasury agreed to reinstate a $3 billion capital reserve amount for each Enterprise to prevent draws on the PSPA due to fluctuations in the Enterprises’ income due to the normal course of business. Despite the new capital reserve, the December 2017 tax cuts caused the Enterprises to draw a combined total of $4 billion at the end of that quarter. Policymakers have been evaluating and developing a potential comprehensive overhaul of the mortgage finance system over ten years after the federal government took control of Fannie Mae and Freddie Mac that could shrink or eventually close the two entities and create a system with more private capital. The Congressional Budget Office (CBO) has provided analyses on these issues. One such analysis prepared at the request of the Chairman of the House Committee on Financial Services, analyzed alternatives for attracting more private capital to the secondary mortgage market and alternative structures for that market, including a fully federal agency, a hybrid, public-private market, a market with a government guarantor of last resort, and a largely private secondary market.

In 2018, the U.S. Senate passed The Economic Grown, Regulatory Relief and Consumer Protection Act (S. 2155), which has emphasized providing regulatory relief for small banks and credit unions and amending the Dodd-Frank Act. Moreover, on June 12, 2017, the Department of the Treasury published a comprehensive report containing recommendations for the financial regulation of banks and credit unions (“A Financial System that Creates Economic Opportunities: Banks and Credit Unions”).”

The IMF’s latest report on New Zealand says that:

“The housing market is cooling but managing housing-related risks remain challenging.
Rising house prices were associated with rapid household credit growth through 2016. Given the slower rise in income, house price-to-income ratios reached unprecedented levels, especially in Auckland where the surge in house prices has been stronger. Household credit growth has moderated in 2017 while household debt continued to rise from already high levels. Given the underlying shortages in housing supply, the moderation in house prices is expected to be slow.

Affordability concerns have also become more pressing, especially for first-time home
buyers. The deterioration in housing affordability because of high house prices as measured by housing cost to income has been partially offset by lower interest rates. Lower income groups remain more adversely affected by declining housing affordability. Rising house prices pose increasing difficulties for first-time home buyers entering the home market as it increases the length of time needed to save for a mortgage down payment regardless of the level of interest rates, and lead to higher debt servicing requirements as they need to have a larger mortgage than in the past.

The housing policy agenda is ambitious and appropriately focuses on closing key gaps
on the supply side and in the tax system. Housing supply shortfalls have contributed to the runup in house prices, reflecting supply constraints amid strong demand fundamentals, including rising net migration, lower interest rates, and stronger income growth. While demand-side drivers have stabilized, they remain robust, and improved housing affordability requires eliminating supply bottlenecks. Supply and demand sides reforms are complementary, and the success of the housing policy agenda will depend on well-coordinated progress on all fronts.

Lastly, improving the availability of housing affordability and other related statistical data is important. Further effort to compile and regularly release key housing related indicators such as house prices, housing costs, housing ownership and affordability measures would help to
enhance analysis and inform policy decisions.”

From a new Econbrowser post by James Hamilton:

“Why does a low or negative spread predict future economic weakness? One factor may be the Fed’s tightening cycle. Historically the inflation rate would at times start climbing above where the Fed wanted it. The Fed responded by raising the short-term rate, the traditional instrument of monetary policy. The market response of long-term rates to the higher short rates was significantly more muted. The result is that the yield spread narrowed as the tightening cycle continued. The Fed often found itself behind the curve, and the last short-term rate hikes were likely a contributing factor to some historical economic recessions.

But we’re still very early in the current tightening cycle. The 3-month Treasury bill has not gone up so far by nearly as much as it did in previous complete cycles, and inflation is still very moderate. So I don’t think it’s time to run for cover just yet. However, if the Fed were to raise the short rate by another 100 basis points without any move up in long rates, we would be into inverted territory, and I would be very concerned. Not a danger sign yet, but definitely an indicator to keep watching.”

A new IMF country report reviews the backdrop to the revamping of the inflation targeting framework in New Zealand. It says that “The Phase One of the Review of the Reserve Bank Act can be regarded as a next step in the gradual evolution of inflation targeting in New Zealand. The new PTA, with its qualitative description of the employment objective, can be regarded as a refinement in the current practice of inflation targeting. The flexible inflation targeting regime was successful in terms of stabilizing output and inflation while maintaining price stability. Recent episodes of inflation undershooting the target serve as an example of uncertainty on the real-time assessment of slack in the economy. The explicit dual mandate will require some changes in the communication of the central bank, including on maximum sustainable employment.”

A new paper finds that “Gross domestic income and gross domestic product—GDI and GDP—measure aggregate economic activity using income and expenditure data, respectively. Discrepancies between the initial estimates of quarterly growth rates for these two measures appear to have some predictive power for subsequent GDP revisions. However, this power has weakened considerably since 2011. Similarly, the first revision to GDP growth has less predictive power in forecasting subsequent revisions since 2011. One possible explanation is that evolving data collection and estimation methods have helped improve initial GDP and GDI estimates.”