My Way Lending

Runaway gas and food prices are the most visible signs of inflation storming back in to the American economy.  The scepter of high inflation will certainly limit the Fed’s ability to stave of recession with further rate cuts.  As prices go up workers demand more money to keep up with the cost of living which is like pouring gas on an open inflation fire.  If the Fed is seen as too weak in controlling inflation consumers begin to expect it which drives this upward-spiral psychology.

From Bloomberg on the phenomenon:

The Fed’s concern: that inflation worries cause workers to demand bigger pay increases to make up for the loss of buying power, setting the stage for a wage-price spiral reminiscent of the late 1970s. Dallas Fed President Richard Fisher made clear this week that policy makers were determined to prevent that from happening.

Inflation expectations for the year ahead as measured by the Conference Board rose to 7.7 percent in May from 6.8 percent in April.

“Consumers’ inflation expectations, fueled by increasing prices at the pump, are now at an all-time high and are likely to rise further in the months ahead,” said Lynn Franco, director of the board’s Consumer Research Center in New York.

Share This

Adjustable Rate Mortgage-holders rejoice, LIBOR not being redefined … for now.  Housing Wire covered earlier how changes to the LIBOR could radically impact home mortgage payments for folks with loans whose interest rates are tied to the index.  You can all breathe a sigh of relief for the meantime, until the BBA  gets around to overhauling the biggest sham of an index that side of the Atlantic.

From Bloomberg on the no news is good news for homeowners:

he British Bankers’ Association failed to change the way the London interbank offered rate is set after investors and strategists said the measure has become unreliable as a gauge of borrowing costs.

The BBA, an unregulated trade group, has been under pressure to overhaul the 24-year-old system after the Bank for International Settlements said in a March report some members understated their rates to avoid being perceived as having difficulty raising financing.

“The committee will be strengthening the oversight of BBA Libor,” the London-based organization said in an e-mailed statement today. “The details will be published in due course.” The composition of the bank panels that contribute rates were left unchanged, it said.

The BBA’s statement fell short of expectations for changes to Libor that ranged from altering the member banks from which rates are gathered to adding an extra rate survey each day to reflect trading in U.S. hours.

“The BBA didn’t do anything; they don’t want to shake the boat,” said Stan Jonas, who trades interest-rate derivatives at Axiom Management Partners LLC in New York. “Any change that they make will damage the interest of their members, and the banks are the members.”

Banks routinely misstated borrowing costs to the BBA to avoid the perception they faced difficulty raising funds as credit markets seized up, turning Libor into “a lie,” according to Tim Bond, head of asset allocation at Barclays Capital, a unit of Barclays Plc

Share This