Publication date: 5 April 2004 | Covering: January – March 2004
Quarterly Briefing
- Fed at 1%: Greenspan’s Fed holds federal funds rate at historic low; “considerable period” language; housing boom accelerating; jobs recovering slowly
- Iraq insurgency: Post-“mission accomplished” reality; Sunni and Shia insurgency growing; Fallujah attack on Blackwater contractors March 31 (FRESH 5 days)
- Spain Madrid bombing: March 11 train bombings kill 191 (FRESH 25 days); attributed to Al-Qaeda; Aznar government loses election; troops to be withdrawn
- Haiti coup: February 29 President Aristide flees; US Marines land; UN stabilisation force requested; Caribbean instability
- US housing: Second year of record home sales; prices up 7–10% nationally; 30-year mortgage rate falls below 5.5%; mortgage refinancing wave
- Dollar weakness: Euro at US$1.25–1.28; current account deficit widening; dollar index near multi-year lows; export competitiveness improving
- Janet Jackson Super Bowl: February 1 halftime show controversy; FCC fines; culture war moment in American politics
- Jamaica: Moderate growth; NHT lending active; commercial rates elevated; BOJ managing inflation and exchange rate
Fed Holds at 1%; Housing Boom Accelerates
The Federal Reserve began 2004 with the federal funds rate at 1% — the lowest level since 1958 — and maintained this historic low throughout the first quarter. The FOMC’s policy statement continued to use the language of “considerable period,” signalling that no rate hikes were imminent. Greenspan’s justification for such extreme accommodation was threefold: the economy, while recovering from the 2001 recession, was still producing “jobless recovery” dynamics with employment growth weak; the risk of deflation, while receding, had not fully dissipated; and global savings glut dynamics were keeping inflation contained. The practical consequence for the US mortgage market was remarkable: 30-year fixed mortgage rates fell below 5.5% in early 2004, fuelling a refinancing wave of extraordinary scale and sustaining the housing boom that had begun in 2001. House prices rose approximately 7–10% nationally in 2003 and were on a similar trajectory in early 2004. The combination of low rates, relaxing lending standards, and rising prices was creating exactly the conditions for an asset bubble — though mainstream economic consensus continued to deny a systemic bubble existed, preferring instead to focus on “froth” in localised markets.
Madrid Bombing; Iraq Insurgency; Haiti Crisis
Three significant international events marked the first quarter. In Iraq, the post-war reality was increasingly defined by insurgency rather than reconstruction: the killing and mutilation of four Blackwater security contractors in Fallujah on 31 March (close to this publication date) was a visceral illustration of the deteriorating security situation. On 11 March, ten coordinated bomb attacks on Madrid’s commuter rail system killed 191 people, in the deadliest terrorist attack in Spanish history. The Spanish general election three days later resulted in the unexpected defeat of the ruling People’s Party — partly attributed to the government’s handling of initial attribution of the attacks to ETA — and the incoming Socialist government announced it would withdraw Spanish troops from Iraq. In Haiti, President Jean-Bertrand Aristide fled the country on 29 February following an armed uprising and US pressure, with US Marines landing to stabilise the situation and a UN stabilisation force subsequently authorised.
Jamaica: NHT and Mortgage Market; Conditions
Jamaica’s economy was growing modestly in early 2004, benefiting from improving tourism performance and a gradual recovery of remittance flows. The NHT continued its subsidised lending programmes at 0%, 2%, and 4% rates on loans up to J$6.5 million individually or J$13 million for two-applicant borrowings, providing the primary affordable route to homeownership for Jamaican workers in a market where commercial mortgage rates remained significantly higher. The Bank of Jamaica managed monetary policy to contain inflation and support exchange rate stability, maintaining the elevated domestic rate environment that characterised the Jamaican financial market. The summer hurricane season loomed as the primary seasonal risk, given the Caribbean’s vulnerability to tropical storm activity.
Looking Ahead to Q2 2004
Markets are pricing in the first Fed rate hike by mid-2004, and the “measured” language from Greenspan suggests 25 basis points per meeting when hiking begins. The Iraq insurgency’s escalation and the Madrid bombing both suggest the global security environment is deteriorating. For Jamaica, the primary near-term concern is the approaching hurricane season and sustaining the gradual economic recovery.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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