Dave Larock in Interest Rate Update, Mortgages and Finances
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The U.S. Federal Reserve issued its latest press statement last week and it didn’t leave me with the impression that it would raise its short-term policy rate in the near future, as some still expect it will.
The Fed’s timing matters to Canadian mortgage borrowers because the U.S. and Canadian economies are tightly linked, and as such, our monetary policies tend to move in the same direction over the long run, even though they can diverge for a period of time (as is expected to be the case if the Fed starts tightening any time soon).
Interestingly, while many economists think that the Fed will hike its policy rate as early as September, bond market investors are now pricing in only a 20% probability of that occurring.
One group has it wrong.
Here are five highlights from the Fed’s latest statement to help inform your opinion on who that might be, with my comments in italics:
I think the Fed’s latest statement makes it unlikely that there is a September rate hike in the cards. In fact, I think the triple whammy of the spiking U.S. dollar, plummeting oil prices and uninspiring growth rates in most of the world’s other major economies make it increasingly unlikely that the Fed will tighten at all in 2015. (And given that the Canadian economy is teetering on the brink of a recession, the odds of a rate hike north of the border are even more remote.)
Haven’t we seen this before? Like last year, and the year before that, and … you get the idea.
If past is prologue … when the Fed issues its September statement it will shift to more hawkish language in an effort to plant a modicum of doubt in the minds of lower-for-longer speculators. Wash, rinse, repeat.
Five-year Government of Canada bond yields were flat last week, holding firm at 0.77% when markets closed 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 2.69%.
Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.80% range, depending on the size of your mortgage and the terms and conditions that are important to you.
The Bottom Line: The Bank of Canada (BoC) has said that it expects to lag the U.S. Fed’s monetary-policy tightening timetable, perhaps for some time. If that happens, the Fed’s first rate hike will act as a kind of distant-early-warning signal to Canadian mortgage borrowers that a BoC hike is somewhere on the horizon … but even that signal seems to be fading off into the distance once again. Given that, I continue to expect that both our fixed and variable rate mortgages will remain at or near today’s ultra-low 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