Interest Rate Uncertainty
Every time that I hear that the nation’s Federal Reserve Board of Governors will get together, I get nervous (along with at least 1 million other folks who are interested in what these policy wonks have to say). In the latest rendition of Federal Reserve folly and fodder, a lot of predictables came to the forefront. The confirmation of the windup of Quantitative Easing III (QE-III) was confirmed. Thus, the last month of Fed purchases mortgage backed and treasury securities will occur in the month of October, and the artificial market for fixed income products will cease to exist. Also on the Fed’s agenda are the accelerated plans to increase short-term rates. Many people expect short-term rates to jump up by .25%, others 50%, and many a full 1.00% (though that is highly doubtful). In all cases, the Federal Reserve Bank’s meetings have become more difficult to decipher, as vagueness and collegiality are now the rules of the day, which go hand-in-hand. Unfortunately, the governor’s desires to appear respectful to one other, while being cryptic to the public have resulted in undesirable effects.
Clearly, markets are making their own decisions about what will happen. Currently, two-year short-term treasury rates are hovering in the .6% range. The average rate for 10-year securities is 2.6%. For those of you who may not follow rates this closely, these are some of the tightest spreads in history. Many feel that this is due to the uncertainty coming from the Fed that is creating uncomfortable waves in our general economy; particularly with regards to an increased number of people who are now employed, but experiencing an average decrease in the dollar amount of wages earned, when adjusted for inflation as reported by the Labor Department. Job losses have slowed and in many cases have been added back to the economy, but people are earning less overall.
Economic indicators are on a seesaw. The months of May and June 2014 revealed decreases in housing construction. The Census Bureau reported that July 2014 reflected a new record of construction jobs, as over one million housing permits were issued. Unfortunately, August construction figures fell off of an economic cliff, as permits issued decreased by almost 15%. Additionally, builders aren’t building homes like they used to, as 10% of vacant homes across the nation, are the ones that were just built! Builders are shifting their attention to multi-family apartment buildings, as there is a broad belief that more consumers are going to be renters as opposed to homeowners in the years to come, as their financial profiles will be weaker than before. We are living in an economic state where more people are employed at lower wages, more derogatory information credit reports, and a general reduction in available credit to make real estate purchases a reality.
The pending shutoff of the most effective stimulus in the history of the American economy, coupled with consumer tepidness unseen since the great depression is a conundrum for the Fed. An increase in rates is needed. With an unstable world around us, Americans want to pull their investment dollars back stateside. Beheadings, border skirmishes, threats of Scottish cessation, and the dismantlement of parliaments in almost every country have left American investors weary of investing abroad. Accordingly, one of the main reasons why rates must increase is to entice these dollars to come back home. However, the will and the economic bravery to do so are unknown.
As people from Main Street, Wall Street, and academia fret and wonder when Janet Yellen and Co. will make some tough but necessary decisions, the uncertainty surrounding not only interest rates, but our economy may not be the main topics of conversation around the lunch counter or our dinner tables, but their consequences will. Unemployed investment bankers will want to have a clue about next steps. Former mid-managers working in entry-level sales positions will want to get some clarity of the future. Also, students in academia considering a college education will watch with trepidation, as many won’t see the benefit of going to college, Med or Law schools if they will be mired in debt with no jobs paying sufficient wages to allow them to live.
Indeed, just thinking about the economy and the effects of raising rates is quite depressing. I hope that the Fed and its contemporaries around the world can figure out when to pull the interest rate trigger. It is said that knowing is half the battle. I guess that not knowing won’t even arm you to be in the battle, and that’s a scary proposition. To the members of the Federal Reserve Bank, we the American people want to be armed and ready, so please speak up soon!
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance; he can be reached at firstname.lastname@example.org.