The Risk of Inflation – and what it means to mortgage rates….
by Tom on October 6, 2009
in Market Musings, Mortgage Rate Updates, banks
The New York Fed Governor who took Tim Geithner’s place made speech yesterday where he talked about inflation or the lack of it. A couple of main points:
- We’ve got 1 to 2 years until inflation becomes an issue.
- The economic recovery is going to be much more mediocre than many hope for (and would like).
- That mediocrity in the pace of recovery, due to a reduction in consumer spending, the reduction of the fiscal stimulus, and the fact that the banking industry isn’t as healthy as it needs to be, will keep inflation lower and allow the government to keep the interest rates that they control lower for a while.
If you recall, I’ve said that I believe we’ve got 12 to 18 months until we see significant movements in inflation and correspondingly on interest rates. A couple of thoughts:
- The fact that the Fed is cutting back on their purchase of Treasuries and mortgage backed securities over the next 6 months will apply some upward pressure. I expect we’ll see rates .25 to .375% higher by next March than we have now.
- The issues that are going on in the currency markets have the potential of increasing rates sooner rather than later.
- The amount of debt that the government has borrowed and will some time have to repay is not going to make interest rates go down.
Summary of what the mortgage market looks like:
- Short term – a fluctuating market based on the economic news of the moment – last week the market looked bad and rates went down. So far this week, the market looks good and rates have been trending up.
- Longer term – the overall trend will be higher rather than lower.
Stay tuned.
Tom Vanderwell
Calculated Risk: NY Fed’s Dudley: Downside Risks to Inflation for “next year or two”
… My assessment of where things stand today is mixed. On the positive side, the financial markets are performing better and the economy is now recovering. …On the negative side, the unemployment rate is much too high and it seems likely that the recovery will be less robust than desired. This means that the economy has significant excess slack and implies that we face meaningful downside risks to inflation over the next year or two.
…… I also suspect that the recovery will turn out to be moderate by historical standards.
First, households are unlikely to have fully adjusted to the net wealth shock that has been generated by the housing price decline and the weakness in share prices.
…The second force that could restrain the recovery is the fiscal outlook. The fiscal stimulus that is currently providing support to economic activity is temporary rather than permanent. This has to be the case if we are to ensure that fiscal policy is on a sustainable path over the long-run. This means that the positive impulse from fiscal stimulus will abate over the next year.
The third, and perhaps most important factor, is that the banking system has still not fully recovered. Bank credit losses lag the business cycle and are still climbing. …
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