Mountain Mortgage column: Rates not impacted by Federal Reserve actions
The Mountain Mortgage Guy
The Federal Reserve raised interest rates on short-term lending this week and left the door open for one more quarter-point increase this year, but even the most conservative of economists are wondering if it was really necessary, and more are wondering if we will actually see another increase.
At the moment, the United States is experiencing previously unknown economic phenomena that all the Feds’ charts and graphs cannot explain. Job growth is robust, unemployment is at record lows, and inflation is declining. In addition, while unemployment has dropped, wage growth has dropped. None of the above should happen in tandem.
Typically, the Fed raises interest rates to turn down the thermostat on demand for goods and services and slow business spending and temper inflationary pressures. Conversely, when the economy collapsed in 2007, the Fed aggressively cut interest rates to about zero to stimulate spending. The rates the Fed controls are those that banks use for overnight loans from the Fed (or occasionally each other). This dictates the cost of money to the banks, which is then reflected in rates charged to the banks customers.
Money for long-term mortgage loans comes from the bond markets and as such is not directly impacted by the actions of the Fed.
One of the tools Fed economists refer to is the Phillips Curve for direction on easing or tightening the money supply. This curve is a mathematical formula charting the relationships among employment, wages and inflation. It has proven to be highly accurate for decades and been tested in dozens of countries and economic regions without fail.
Something Odd is Happening
But right now, something odd is happening: The curve shows that the United States should be seeing wage growth and alarming signs of inflation, but all measures show the U.S. rate of inflation dropping from an annual rate of 2.7 percent as recently as February to 1.9 percent in May. Wage growth also slowed in the same period.
Conventional wisdom would dictate not raising interest rates during periods of contracting wage and inflation growth, but the same wisdom dictates increasing interest rates as unemployment drops. Whatever is the Fed to do?
What is going on out there that is not reflected in the measurements of the economy that is throwing off the legendary accuracy of the Phillips curve? One theory is Americans are working more, but somehow not getting paid more. Thus, while more people have jobs, they are buying fewer consumer goods because they have less discretionary income.
Some economists feel that consumers learned a hard lesson from 2007 and are still cautious about making major expenditures unnecessarily, or are buying conservatively when shopping for items such as cars, electronics and clothing. Others credit the competition of the internet to holding down inflation, and as millions of homeowners know, you can’t plan on your home equity increasing by double digits every year.
As to how this will impact mortgage rates and the demand for homes in the future remains to be seen, but more and more economists are hinting that we will not see 5 percent rates this year, down from a nearly unanimous verdict at the end of 2016.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.