Dave Larock in Interest Rate Update, Mortgages and Finances
Editor's Note: The Interest Rate Update appears weekly on this blog - check back every Monday morning for analysis that is always ahead of the pack.
The U.S. Federal Reserve left its policy rate unchanged last week, as most were expecting. It acknowledged some improvement in the recent economic data but maintained its cautious overall view.
Here are the highlights from the Fed’s latest statement:
- “Labour market conditions have improved further even as growth in economic activity appears to have slowed.” These two trends can’t move in opposite directions for too long. Either the overall economic activity will start to improve or labour-market conditions will start to soften in the coming months.
- “Growth in household spending has moderated, although households' real income has risen at a solid rate and consumer sentiment remains high.” This anomaly must be confounding policy makers. If incomes are rising and consumers are confident, why are they choosing to save rather than spend? The answer to this question is important because American consumers account for more than two thirds of U.S. GDP, so as they go, so too goes the U.S. economy.
- “The housing sector has improved further but business fixed investment and net exports have been soft.” Housing-sector improvement gives us further confirmation that consumer-confidence levels are rising, but soft business investment is cause for concern. U.S. businesses are flush with cash that they are using for non-productive purposes, like share buy backs, rather than for investment in capacity enhancements and expansion. (To that end, U.S. productivity levels continue to fall.)
- “Inflation has continued to run below the Committee's 2 percent longer-run objective … [and] is expected to remain low in the near term … but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.” U.S. inflation rates should remain low for as long as U.S. consumers continue to save rather than spend their extra income, and that allows the Fed to continue to focus its attention elsewhere.
- “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” This cautious summary statement gave markets reassurance that U.S. policy-rate hikes are still a ways off and investors got the message - the futures market lowered the odds of a Fed rate hike at its next meeting in June from 21 percent down to 15 percent.
The Fed’s continued caution seems warranted. While both U.S. consumer and business confidence levels still appear high, the proof of the pudding is in the eating and neither group is showing confidence where it matters most, at the checkout counter. Also, global instability risks remain elevated and a more bullish Fed statement could well have triggered another surge in the U.S. dollar. This would have heaped more suffering on already beleaguered U.S. exporters and might also have exacerbated global instability risks, which remain elevated.
Five-year Government of Canada bond yields fell by two basis points last week, closing at 0.88% on Friday. Five-year fixed-rate mortgages are available in the 2.39% to 2.59% range, depending on the terms and conditions that are important to you, and five-year fixed-rate pre-approvals are offered at around 2.79%.
Five-year variable-rate mortgages are available in the prime minus 0.30% to prime minus 0.40% range, which translates into rates of 2.30% to 2.40% using today’s prime rate of 2.70%.
The Bottom Line: The Fed maintained its cautious monetary-policy stance last week. As such, any U.S. policy-rate rises still appear to be a ways off and that should help keep both our fixed and variable mortgage rates at or near today’s levels for the foreseeable future.
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
May 2, 2016
Mortgage |