Have Interest Rates Gone Up This Week - By Paul Centopani Close text About Paul twitter PCentopani mailto [email protected] linkedin paul-centopani Apr 29, 2021 12:59 pm EDT Read 1 minute
The yield on Treasury yields has kept mortgage rates below 3% recently, but positive economic news could mean higher hikes after this week's increase.
Have Interest Rates Gone Up This Week
After three weeks of declines, the average 30-year fixed-rate mortgage rose to 2.98% from 2.97% the previous week, according to Freddie Mac's latest prime mortgage market survey. 30-year FRMs averaged 3.23% a year ago at this time. The government-backed firm forecast the 30-year FRM to rise to 3.4% by the end of 2021 and 3.8% by the end of 2022 in its first-quarter forecast.
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Federal Reserve Chairman Jerome Powell's announcement this week that he had no plans to raise interest rates or reduce purchases of mortgage-backed securities put downward pressure on Treasury yields, likely producing only a modest change, Zillow economist Matthew Speakman said in a note. However, this limited growth could be short-lived in anticipation of positive economic news ahead.
"Looking ahead, with a number of key economic reports on the horizon (including consumer spending and inflation data), the relatively subdued activity in mortgage rates over the past two weeks could translate into more movement. Important," said Speakman.
The 15-year average FRM also rose to 2.31% from 2.29% the previous week, and down from 2.77% a year ago. Meanwhile, only the Treasury indexed 5-year variable rate mortgage fell significantly to an average of 2.64% from 2.83% a week earlier and 3.14% annually.
Despite low interest rates, which usually encourage refinancing by borrowers and potential buyers, production continues to decline. Refinancing activity over the past 12 months may limit the growth of this type of credit, while the extremely low housing supply is creating stiff competition for fewer homes, discouraging potential sellers who fear foreclosing on their next home.
Interest Rates Will Rise
"For eager buyers, especially first-time buyers, inventory remains very tight and competition for available homes remains strong," Freddie Mac Chief Economist Sam Khater said in a press release. Earlier this week, the Federal Reserve voted again to raise interest rates by 0.75% - the fourth consecutive significant historic increase. Inflation remains at the forefront of US monetary policy decisions and it was inflation that drove the FOMC's efforts to keep the pace of rate hikes fast. With interest rates rising so quickly, the big questions remain: How high will they go?
Futures markets currently expect short-term interest rates to rise to around 5% in mid-2023, before falling to around 4% by 2025 and hovering between 4 and 5% in subsequent years. That's significantly higher than the top interest rate estimate just four months ago, and a far cry from the 1.5% forecast for mid-2023 earlier this year. 30-year fixed mortgage rates are near 7% for the first time in 20 years, 10-year yields are above 4% for the first time since the financial crisis and short-term interest rates are now at their highest level in more than 20 years. the years more than a decade So how have interest rates moved so quickly after being near 0% for years in such a short time? The answer lies, in part, in the changing relationship between rates, financial conditions and inflation.
Monetary policy direction. At different times and under different conditions, the same interest rate policy can produce very different outcomes, and it is the relationship between interest rates and these outcomes that best encapsulates the true direction of monetary policy.
Decomposing corporate borrowing costs into an average risk-free rate and credit spread component helps clarify this. Over the past year, rising interest rates have dramatically increased the average risk-free loan rate above anything we've seen in the last decade. That, in turn, has increased high-yield credit spreads - the premium the riskiest corporate borrowers must offer to borrow money, a key measure of financial conditions. In other words, rising rates have worsened financial conditions, but the relationship between risk-free rates and financial conditions has remained stable over time. Today's high rates create conditions that are relatively worse than in the 2018-2019 tightening cycle, but relatively better than in the 2012/2016 cycles. The lower rates of 2012/2016 were relatively tight, and today's higher rates are relatively loose given the relative state of the economy over time.
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The relationship between financial conditions and the target variables of monetary policy—mainly inflation—is also not stable over time. The rapid deterioration in financial conditions led to lower inflation expectations, but inflation expectations remain higher today than at any point in the 2010s. The increase in 2018/2019 managed to fall below any figure consistent with the Federal Reserve's 2% target, but today. a greater comparative deterioration in financial conditions has recently brought inflation expectations back on target. consistent levels.
Over the past year, we've seen financial conditions worsen significantly after the Fed raised rates to 3.75%, but conditions worsened more than when the Fed raised rates to 2.25% in 2019 and less than when the Fed began signaling tighter policy in 2015 . 2016. Similarly, today's tighter financial conditions have yet to have the same impact on inflation or real economic variables as they did during the 2019 or 2015 tightening cycles. Interest rates must be evaluated in terms of their impact on real economic variables to determine the stance of monetary policy. , and policy is arguably looser today than it was in the 2010s, despite nominally higher interest rates.
Hence another important counterintuitive idea: high interest rates tend to be a sign that monetary policy was too accommodative in the recent past, and low interest rates tend to be a sign that monetary policy was too restrictive in the recent past. Most people refer to the zero interest rate policy (ZIRP) era of the 2010s as "easy money," but compared to the extreme credit crunch and weak employment, nominal growth, and inflation of the financial crisis, monetary policy really existed. too tight On the contrary, the rapid real economic recovery and the sharp rise in inflation we've been experiencing recently have made 0% interest rates very difficult and have pushed real and nominal interest rates much higher since then. Compared to pre-pandemic levels, five-year real interest rates and five-year inflation expectations are significantly higher, and five-year nominal Treasury yields are up nearly 2%. Higher nominal interest rates, in fact, indicate the continuation of monetary policy after inflation has risen.
I don't want to cover this case fully, though. Today's high interest rates clearly have real macroeconomic effects and are a big reason why recessionary risks are high. The yield curve is significantly inverted which, while by no means a guarantee of a recession, suggests that market participants expect rate cuts in the near future and are increasingly concerned about the short-term economic outlook.
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By historical standards, it is completely implausible that such low interest rates could lead to such high recession fears in such a high inflation environment. Various specifications of the Taylor rule, a simple but popular monetary policy model that sets interest rates based on inflation and estimates of potential output, would suggest that interest rates between 6.5% and 8% are needed to stop inflation. Instead, peak rates around 5% and 5-year real interest rates below 2% threaten to overturn the US economy.
It is a good reminder that despite the current inflationary turmoil, the structural forces behind the long-term decline in real interest rates remain. Wealth inequality is still high, growth in the working-age population is still low, productivity growth is still low, and global populations continue to age, likely putting downward pressure on interest rates in recent decades. The main change driving up real interest rates is the shift from the weak demand environment of the 2010s to the structural demand environment we are experiencing today - and that is the significance of this appropriate change in monetary policy by the Federal Reserve. very difficult time to calculate.
The level of interest rates will largely depend on whether the relatively good economic environment will last. In September, Jerome Powell and the rest of the Federal Open Market Committee believed long-term interest rates would stabilize around 2.5%, which is below long-term Treasury yields. In other words, the markets are less concerned about an immediate return to the ZIRP era of the 2010s and pay higher and higher long-term interest rates. However, they still don't see anything that will pull us completely out of our historically low global rate environment: yields on the 100-year Austrian bond may have risen 1.5% over the past year, but they still remain below 2.4%. Interest rate uncertainty remains very high, however. Unfortunately, no one seems to know how high interest rates can go.
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