Dave Larock in Interest Rate Update, Mortgages and Finances
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Last Thursday U.S. Fed Chair Janet Yellen confused markets once again when she seemed to contradict the Fed’s cautious policy statement from the week prior. For example:
- Fed Chair Yellen said that the currently low levels of U.S. inflation are likely to prove transitory, but the U.S. Fed’s latest forecast doesn’t show overall inflation returning to the Fed’s 2% target until 2018. Transitory is defined as “brief, short-lived and passing” and this simply doesn’t correlate with the Fed’s forecast for a gradual increase in the rate of inflation.
- The Fed had cited heightened global instability risks as a main justification for keeping its policy rate unchanged, yet last week Yellen said that she doesn’t expect these same forces to significantly alter the Fed’s policy. Haven’t these forces already significantly altered the Fed’s monetary policy?
- Fed Chair Yellen said that most Fed participants still anticipate that it will be appropriate to begin raising its policy rate later this year, but the market is pricing in a low probability of this occurring (and the market has proven much more accurate than the Fed when it comes to forecasting the policy rate). While she included many caveats, like inflation increasing more slowly or the dollar falling more sharply than expected, it seems increasingly unlikely that the Fed will actually raise its policy rate in 2015. I wonder if Fed Chair Yellen is once again trying to use her words to keep the market from adopting a ‘low-rates-forever’ mindset without actually backing up these words with action. If that’s true, it’s hard to imagine that this technique will work for much longer before the Fed has to put its money where its mouth is.
There are smart people on both sides of the argument about whether the Fed will ultimately raise its policy rate this year. Interestingly, China and Japan have gone from being the biggest buyers of U.S. treasuries to being net sellers of late, and while that drop in demand has thus far been absorbed by other buyers, if overall demand for treasuries wanes, we will see U.S. bond yields rise regardless of what the Fed does. It would be ironic if 2015 ended with the Fed announcing the start of QE4 to counteract upward pressure on U.S. government bond yields rather than with the Fed raising its policy rate. That may sound a bit off the wall at the moment, but market analysts who have proven prescient in the past are now talking about the advent of QE4. Stay tuned.
Five-year Government of Canada bond yields rose by ten basis points last week, closing at 0.86% on Friday. Five-year fixed-rate mortgages are offered in the 2.49% to 2.59% range and five-year fixed-rate pre-approvals are available at rates as low as 2.64%.
Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.75% range, depending on the size of your mortgage and the terms and conditions that are important to you. A few lenders shrank their discounts down to prime minus 0.50% last week, so if you’re in the market for a variable rate, you are well advised to secure a pre-approval.
The Bottom Line: Markets are increasingly confused about the Fed’s policy direction and that uncertainty is likely to make them more volatile. This heightens the significance of each new economic data release and raises the possibility that investors will overreact to both downside and upside surprises. While I expect that both our fixed and variable mortgage rates will hold steady for the time being, nervous markets make me less confident about that view. In the mortgage world, forewarned (and pre-approved) is forearmed.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog, Move Smartly, and on his own blog: integratedmortgageplanners.com/blog Email Dave
September 28, 2015
Mortgage |