One and Done?

Sometimes you have to riff a bit this time of year. Meaningful news is scarce, which is understandable. With the majority of people preoccupied with December holidays and New Year festivities, much of the news falls on deaf ears anyway.

For the engaged minority, substantive topics are still worth discussing. Few are more substantive than the Federal Reserve and interest rates. Admittedly, we've done our fair share of riffing on the Fed and interest rates, and for good reason: The Fed is the gift that keeps giving. Its influence over housing and mortgage lending can't be understated.

Now that the Fed has finally notched its belt with a federal funds rate increase, punditry and interest-rate speculation run rampant. We again join the fray.

The prospect of rising mortgage rates can be a good marketing tool. It motivates potential home buyers and refinances to act now.  We've voiced our opinion that higher rates reside in our future, but now we have to tack back. We've changed our opinion somewhat; not so much because the facts changed, but more because they haven't improved.

Gross domestic product growth (GDP), for instance, continues to languish stubbornly. Yes, GDP growth at 2.0% for the third-quarter allowed the Fed to raise the fed funds rate, but growth for the fourth quarter was recently revised down to 1.3% by the Federal Reserve Bank of Atlanta. Slower economic growth will give Fed officials reason to pause on an immediate follow-up rate increase.

If you look around the globe, you'll find deflation, not inflation, remains the great concern. Oil prices are near a seven-year low; natural gas prices are at a 14-year low. Many commodity indexes (Bloomberg Commodity Index and Rogers Agricultural Index, most notably) are at multi-year lows. Central bankers are much more keen to cut interest rates, not raise them, in a deflationary environment.

What's more, the U.S. dollar will rise even further against the world's currencies if the Fed continues to hike interest rates. The dollar is already at a multi-year high against many of the world's major currencies. Yes, this is good news for U.S. international travelers and importers, but it's bad news for U.S. exporters. 

With all that said, we still see some possibility of higher mortgage rates, just not across the lending spectrum. You may have noticed that short-term lending rates have drifted somewhat higher, but longer-term rates remain flat, even down, depending on when you asked for a quote. We're seeing a flattening of the yield curve. The spread between short-term rates and longer-term rates has narrowed.

This isn't all that unusual. The fed funds rate will impact the short end of the yield curve first. Because inflation expectations remain low, it's failing to raise rates on the long end of the curve. This suggests long-term rates could remain at current levels for some time to come – through the first quarter of 2016 seems reasonable to us.

But, of course, that outlook could change if the facts change.   

Information provided by Jessica Regan.

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