Last Week In Review: Rates Go on Vacation
Longer-term U.S. interest rates, including home loan rates, remain on the rise. The big story of the week is Fed Chair Jerome Powell on Capitol Hill to provide his real-time assessment of the economy and rates while attempting to "sell" the notion that higher inflation will not be a problem.
"Inflation will not hit our target for three years." - Jerome Powell
Mortgage rates are determined by the trading action in mortgage-backed securities (MBS), and those instruments respond to inflation and inflation expectations. If inflation moves higher, MBS prices move lower and rates move higher, and vice versa.
Inflation expectations have crept up to the highest levels in seven years. The enormous economic stimulus along with COVID loosening its grip, vaccinations moving quickly, economies re-opening, and consumers ready to spend has caused the spike.
Fed Chair Powell attempted to talk down inflation by suggesting it will be volatile in short term but will not even meet the Fed's target of 2% for three years. The bond market was not having any of it, and despite Powell's seemingly comforting words on inflation, bond prices dropped all week, sending mortgage rates higher.
The Fed Doesn't Control Long-Term Rates
This recent uptick in rates is a stark reminder that the Fed doesn't control long-term rates. Despite purchasing $30B in MBS in the last week in an effort to help keep rates low, rates only moved higher.
Durable Goods Orders Tell a Good Story
On February 17, the Retail Sales Report for January came in five times better than expectations, and this past Thursday, Durable Goods Orders confirmed the strength of the U.S. consumer.
A durable good is an item with a life expectancy of at least three years. Think appliances, furniture, and electronics. These items cost more money, so it is a positive sign to see consumers have the ability, willingness, and confidence to make these purchases. We should expect future readings to be sound as the U.S. economy gets back to fully open.
$1.9T Stimulus Plan at Risk
The recent round of strong economic readings coupled with more state reopenings and vaccination progress has many on both sides of the aisle questioning the size of the $1.9 trillion stimulus plan.
One could argue there is no better stimulus than getting the entire U.S. economy back open.
A plan will need to be approved by mid-March as unemployment benefits are due to expire.
Should the bill get trimmed back, it may help the bond market and rates, as it would likely lower inflation expectations. Some of the present fear in the bond market is the idea that a large stimulus package will exacerbate rising inflation pressures.
Bottom line: Home loan rates are still historically low. With all of the good news and more and more stimulus, we should expect rates to creep higher still. Now is a great time to take advantage of rates before we see an even further rise.
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