Mortgage Rates are generally “ruled” by the Bond Markets – and in the past few decades, while there have been DIFFERENT buyers of US Bonds… we’ve come out pretty much as the currency (bonds are valued after all in US Currency) that everyone around the World still trusts and wants to own. Because of that, it’s easy to see that one of the biggest drivers of economic “fortunes” from a global economic perspective is the currency market.
We’ve all been hearing on the news lately about the Ebola break out, and the ISIS / Syrian crisis – but did you realize that Globally, the FRENCH Bonds (tied to French Debt and it’s Currency) was DOWNGRADED by the DOW on Friday afternoon? That was big news, if you are an Economics Junkie, like I am!
While most Americans never actually see a foreign coin, every time we walk into Wal-Mart, our prices are in some ways tied to the ups and downs of currency valuations, just like every person around the world who participates in the movement of goods and services around the globe.
“In fact, globalization means that currency values are more important than ever. The world is more tightly interconnected now than it has ever been, which means that events which previously had no effect upon global affairs can trigger cascades of events that affect everyone.”
Which is why the downgrade in France, the disturbing news about the German Economy slowing have, in my mind a much broader effect on the US Bond Market, and our mortgage interest rates than the Ebola headlines and perhaps even the Terrorist threats from the Middle East.
One Economics genius I follow recently wrote: “I believe we are in the early stages of a profound currency-valuation sea change. I have lived through five major changes in the value of the dollar in the 45 years since Nixon closed the gold window. And while we are used to 40% to 50% moves in the stock market and other commodity prices happening in just a few years (or less), large movements in major trading currencies typically take many years, if not decades, to develop. I believe we are in the opening act of a multi-year US dollar bull market.”? Do you know what a “US Dollar Bull Market” means for Mortgage Rates? Good news for the Economy (Bull market) usually means HIGHER rates for mortgage loans… but not so fast on that trigger – because we now see our “New Fed” advisers in an even more tricky position!
Could The Real Question Be Inflation versus DIS-Inflation?
Overall, the Dollar has been in a pretty tight range over the past 10 years – leaving little room for those who say we are about to go headlong into a full on Bull Market. This is in contrast to the true doom-and-gloomers, who are forecasting “the Demise of the Dollar.” It all kind of reminds me of the joke that compares Economists to Weather Forecasters – if you don’t like the forecast, change the channel and someone else is likely to have a different perspective.
Many Economist and TV Analysts are calling for an unseemly rise in interest rates, and many of them believe the Federal Reserve will push us over the brink into hyper-inflation.
This week saw two side ‘comments’ by Federal Reserve members that put a distinct chill in the air – because as I said, they really are in a quandary, due to the fact that it appears, from many different vantage points, that Europe is slowing down.
Recently we heard comments from , William Dudley, the president of the Federal Reserve Bank of New York and a permanent voting member on the FOMC. In a speech at Rensselaer Polytechnic Institute, he pushed back on the idea that it is time to raise rates. While acknowledging the relatively positive stance of the Federal Reserve in its forecast, he said:
While I believe that the risks around this consensus forecast are reasonably well-balanced, I also believe that the likelihood that growth will be substantially stronger than the point forecast is probably relatively low.
What does that mean? To me, it says that there’s a very low chance that the US Economy is going to reach the Economic “stronger than expected” forecasts we heard about earlier this year.
Each of Dudley’s points was covered in long paragraphs. And then he delivered a short, line that caught several people off guard – He cited the growth in the exchange value of the dollar over the last few months as a reason for downside risk. Really?
Why should dollar strength show up in a list of reasons for upcoming weakness in the US economy?
The next day saw the release of the minutes of the previous month’s FOMC meeting. In the part labeled “Staff Review of the Financial Situation, the staff mentioned “… responding in part to disappointing economic data abroad, the US dollar appreciated against most currencies over the inter-meeting period, including large appreciations against the euro, the yen, and the pound sterling.”
Okay, what’s this got to do with Mortgage Interest rates?
Why do we care what happens to the strength of the dollar in relationship to the Federal Reserve and the US Treasury? The value of the dollar touches everything. So let’s think about some of the consequences over the long-term of a rising dollar.
Bottom Line for the Fed to be able to raise Interest Rates?
The Fed stopped the QE Program, which had them buying more mortgage notes that anyone else in the world. “A rising dollar is almighty inconvenient for a Federal Reserve that would like to eventually raise interest rates.” Multiple regional Fed presidents and Fed governors would really like to see inflation in the 2% range before they are willing to raise rates.
A dollar that is rising against the currencies of our major trading partners is inherently dis-inflationary, if not outright deflationary. The current inflation rate is 1.7%. The Dallas trimmed-mean PCE inflation rate was actually negative in August and has been falling for the last five months, more or less coinciding with the rising dollar.
BAD News in the Economy (and deflation is BAD news) usually means GOOD NEWS for Mortgage Interest Rates.
Fourteen of the 17 members of the Fed (including the 12 regional presidents) anticipate that rates will be raised in 2015. Most Economic observers think the first rate increase will happen at the June meeting.
What happens if unemployment continues to fall toward 5.5% and inflation drops below 1.5%? Can this Fed – not you or I, but the aggressively Keynesian members sitting on that board – justify raising rates if inflation is only 1.5% and falling? Which is the more important data number, unemployment or inflation? Or do they both need to click into place? If the dollar were to continue to rise and thus allow Europe and Japan to export their deflation to the US, it is not clear that the Fed would raise rates in June.
A rising dollar presents all sorts of problems and opportunities for the central banks of the world. Which is why I chose the graphic of just burning the bridge – Japan has chosen the most aggressive monetary policy in the history of the world and will, I believe, work to see the value of the yen cut in half over time. This means their goods and products will be less expensive, and more valuable when you shop in Wal-Mart (for instance) when compared to the current world provider – China.
For similar reasons, Europe would clearly like to see a weaker euro against the dollar and other major trading currencies. Ditto for almost every central bank in the world. But a rising dollar creates special problems for China (obviously) and other emerging markets.
In an important speech on Saturday, October 11, Fed Vice-Chairman Stan Fischer outlined the mechanisms for the international transmission of monetary policy. Fischer says the international effects of monetary policy “spill back” onto the US, and the central bank cannot make “sensible” choices without taking them into account.
[T]he U.S. economy and the economies of the rest of the world have important feedback effects on each other. To make coherent policy choices, we have to take these feedback effects into account.
He ended with an assurance to all that the Federal Reserve would provide liquidity to the world in the event of another crisis… Could this be another sort of QE Program to purchase Bonds??
The bottom line? It’s every central bank for itself.
The Federal Reserve is in the Hot Seat once again. If it raises rates, it certainly could cause a ripple or tear in the fragile World Economics picture. If it doesn’t raise rates, as expected next Spring – it could signal a continued weakness in the US Economy, and drive away the “bulls” who have been investing heavily in the US.
We live in interesting times, it could be that NOW is the best time to buy a house in Raleigh – while mortgage rates are so low! If you are looking for the best Mortgage rates, call Steve and Eleanor Thorne 919 649 5058. We really do keep up with the Economic behind the market, and understand what is driving the Mortgage Interest Rate markets, and what it takes to give you the BEST Mortgage Rates.
I try and answer all questions :)