Dave Larock in Interest Rate Update, Mortgages and Finances
Editor's Note: The Interest Rate Update appears weekly on this blog - check back every Mon morning for analysis that is always ahead of the pack.
The U.S. Federal Reserve left its policy rate unchanged last week, as was widely expected, but it also surprised markets by adopting a far more dovish tone about the U.S. economy’s prospects.
How quickly circumstances can change.
When the Fed raised its policy rate in December, its rate-setting committee had predicted that there would be four more rate hikes in 2016. Now, just a month later, the Fed sounds much more cautious and U.S. fourth-quarter GDP growth just clocked in at a paltry 0.7%. Investors are now betting that the next Fed rate hike won’t be until February 2017 (according to CME Group 30-Day Fed Fund futures prices).
The U.S. Fed’s policy statements matter to Canadian mortgage borrowers because our economies are deeply interlinked. That means that while our respective monetary policies can diverge somewhat for a period of time, the Bank of Canada (BoC) will tend to move in the same direction as the Fed over the longer term. As such, the Fed’s policy statements act as a sort of distant-early-warning system for Canadian mortgagors who are trying to predict the timing of the Bank of Canada’s next rate hike (as distant as that prospect may now seem).
Here are the highlights from the Fed’s latest statement:
It is worth remembering that so far, central banks have reversed every policy-rate increase they have enacted since the start of the Great Recession. This fact is not lost on some of the experts whom I read regularly and they are predicting that the Fed is likely to do the same again. Their view is being bolstered by lackluster U.S. economic data to kick off the new year, by rising uncertainty about China’s near-term growth prospects, and most recently, by the Bank of Japan’s decision last week to impose negative interest rates on the excess reserves that it holds for institutions. It’s hard to imagine that the Fed will continue to raise rates when other countries are ramping up a currency war in a desperate (and flawed) attempt to stimulate their economies and to stem deflationary pressures. And against this backdrop, it’s hard to believe that only a month ago, the consensus was calling for materially higher U.S. interest rates in 2016.
In Canada, perhaps without precedent, CIBC World Markets has just downgraded its growth forecast for our GDP for the second time in a matter of a few short weeks. How quickly circumstances can change indeed … on both sides of our border.
Five-year Government of Canada (GoC) bond yields fell by nine basis points last week, closing at 0.67% on Friday. Five-year fixed-rate mortgages are available in the 2.49% to 2.74% range, depending on the terms and conditions that are important to you, and five-year fixed pre-approvals are offered at rates as low as 2.79%.
Five-year variable-rate mortgages are available in the prime minus 0.45% to prime minus 0.30% range, which translates into rates of 2.25% to 2.40% using today’s prime rate of 2.70%.
The Bottom Line: The Fed surprised markets by sounding more cautious than in its previous statement about the U.S. economy’s prospects and about the timing of its future policy-rate increases. U.S. bond yields fell in response, as did GoC bond yields, which are highly correlated with their U.S. counterparts. The longer the Fed delays its monetary-policy tightening timetable, the more likely it is that our fixed and variable mortgage rates will stay 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