This weeks Federal Reserve meeting, whatever decision is reached on interest rates, will offer up a rare opportunity to gauge the degree to which expectations about monetary policy play a direct role in the borrowing decisions of American consumers.
Expectations of a boom in the mortgage sector, particularly in the area of refinancings, have already led to sharp gains in both share prices and business volumes for a range of companies.
Countrywide Credit Industries Inc., for example, reported record mortgage application volume in February following a rapid-fire pair of 50-basis-point monetary easings in January. Likewise, Fannie Mae has already ratcheted up expectations for its own profits this year, citing already-surging refinancing volumes.
The question is, how many consumers are still sitting on the fence, awaiting what a growing number of economists think could be an even bigger easing this week?
Certainly, the American consumer has shown great ability to adjust short-term behavior to capture some dollars when opportunity presented itself. And while still strong by historical standards, mortgage activity has dropped off in recent weeks. The Mortgage Bankers Association of Americas market composite index of mortgage loan applications a measure of loan purchases and refinances dropped 10.5% for the week that ended March 9, the last available sample.
Still, it is not an easy question to answer based on economic history.
The best example of economic agents delaying actions until they get the best possible deal has not been in the area of monetary policy but in the area of fiscal policy, said Tom Carpenter, managing director and chief economist at ASB Capital Management, which is owned by Chevy Chase Bank.
The textbook example was (early in the Reagan presidency), when tax cuts were phased in and you saw weak fourth quarters as economic agents decided not to recognize income until the next quarter, he said. (Which may well mean that, as far as using tax and interest rate cuts to spur the economy, sooner is not just better, it is paramount.)
Of course, for corporate or consumer borrowers whose rates are adjustable, the timing of rate cuts hardly matters. And for all practical purposes, market rates have already come down in response to economic data and the central banks transparency drive, in which rate cuts are more clearly telegraphed.
That may well mean that mortgage rates for consumers are as low as they are going to get during this particular cycle. But dont try selling that message to a homeowner trying to call the interest rate bottom. Within the universe of borrowers, this may be the one category above all that has displayed a historic tendency to hold out, if only for just a little bit.
Where there is some delay for that best rate is the mortgage customer who wants to refinance, Mr. Carpenter said. But the most that they wait is a month or two.
That wait might mean a potential wave of refinancing volume in the second quarter, especially if markets did their preparatory work correctly and rates to borrowers do not shift dramatically after a relatively large Fed easing. This assumes rates have reached a level sufficient to motivate borrowers to refinance, an idea which is not accepted by all on Wall Street.
One positive outcome of a refi boom would be that it could abate the increase of consumer credit problems many Wall Street analysts have fretted over as they peer into their second-half crystal balls. Refinancing is one of the mechanisms that hold down mortgage delinquencies.
The fourth quarter of 2000, when the slowdown seemed to gain full hold of the economy, saw increased delinquencies in both mortgage and credit card payments, according to the MBA. Douglas G. Duncan, who is chief economist at the group, said on the mortgage side, at least, that increase could slow in the face of a wave of refinancing.