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The Fed Ponders the Jobs Report

12:00 AM, Jul 6, 2013 • By IRWIN M. STELZER
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Two dangers lurk. The first is the recent run-up in interest rates, which has taken the rate on the commonly used 30-year, fixed-rate mortgages up about a full percentage point, to around 4.5 percent, in a relatively few weeks. Some experts say that this jump, and the fear that rates will head still higher, will encourage buyers to come off the sidelines and into the housing game. Others say that higher rates will discourage many buyers. There is evidence enough for both sides of this argument. The Mortgage Bankers Association says that purchase applications rose 7 percent since interest rates headed up, while Redfin, a property web site, reports that the number of clients making offers fell 10 percent during that same period. It will be several months before we learn which of these early signals on the road to still higher rates is pointing in the right direction.

The second worry is that we have entered bubble territory. In the hotter markets, homes often stay on the market for only a few days, and eager buyers pay above asking prices. That, plus the rumored re-emergence of risky lending practices, screams bubble to analysts who remember conditions in 2007. Perhaps, but only perhaps. Houses are in short supply, prices are far below their 2005 peaks, the bite that mortgage payments take out of incomes remains low by historic standards, and the jobs market continues to improve, surprising on the upside.

The private sector added 202,000 jobs in June, the third straight month in the 200,000 range. An uptick in the labor force participation rate, and a ten-cent increase in average hourly earnings are further bits of good news. But the unemployment rate remains stuck at 7.6 percent, and the number of workers counted among the employed but involuntarily working short hours increased by over 300,000.

All in all, good but not great. The wealth effect resulting from higher house prices seems to have offset the drag created by tax increases and the sequester’s cut in government spending. If the Fed is worried about continued high unemployment, it will postpone any tapering in its asset-buying program. But if it agrees with many private-sector forecasters that U.S. growth will accelerate in the second half of the year it will start cutting back its purchases in September. A sprucing up of the global neighborhood in which the U.S. economic house resides might just tip it towards tapering. 

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