The Fed is Keeping Rates (Artificially) Low
Whether you’ve bought a house, re-financed or borrowed money, rates reflect historic lows. Credit card rates haven’t seen any help though. The Fed is keeping rates (artificially) low for borrowers.
Have deposits also? Don’t count on earning any interest. Soon you may have to pay to keep your money at a bank like many countries in Europe and Asia. As a result, home prices have soared, the stock market has soared, crypto currencies have soared.
Who represents the biggest borrowing entity in the world? That would be the federal government. It needs to finance the borrowing binge in process. And, another $4.5 to $6 trillion in spending may be pushed forward. Think prices have gone as high as they are going? What about inflation? The spending and borrowing binge will spike inflation higher than anytime in the past 40 years.
Federal Reserve Quandary
This puts the Federal Reserve in a quandary. It has been keeping rates low to finance government binging, to “stimulate” the economy and also for political purposes. That stimulation has flowed to prices of all assets: lumber and home building materials, metals, crypto, housing, rents, stocks, art, and other items as oceans of money go to bid up prices. Inflation now has risen. The Federal Reserve’s twin mandates are managing inflation and full employment. Nowhere does financing government spending fit in the mandates.
To fight inflation, the Federal Reserve has signaled it will stop buying (start tapering) every asset in sight (prices high, rates low). It will even begin reversing the policy and start selling assets. This comes at a time when the federal government would need to borrow that $4.5-$6 trillion. If done concurrently, massive spending and no Federal Reserve buying, rates naturally spike. Look at the graph below how much the Fed needs to sell out. It has bought $120 billion per month. Stop that buying and start selling the excess $7 trillion ($4.5 trillion in the last 18 months) it bought up from the 2008 crisis till now will cause more than a ripple in rates. Some predict a 25% or more correction in the stock market over the next year. Of course, some don’t. The Fed has been keeping interest rates low — too low.
You decide.
What About Mortgage Rates?
The Fed buying has kept mortgage rates low. By buying lots of mortgage investments, the Fed boosted demand as one of the biggest players buying mortgage bonds. Talk of tapering – slowly buying less over time until purchases stop – sent rates on a small spike during the week of September 20. What happens when tapering actually does start? How much of a spike will happen?
