Longing for the Good Ole Days

Last week, we presented a minor lament on the difficulty in forecasting interest rates. Then, of course, we offered a forecast: We didn’t believe that the Federal Reserve would raise the federal funds rate – the base rate for most other interest rates – no sooner than December, if not later.

We also implied there was a good chance that mortgage rates would hang low for a while. That is, they would hang in the same low, tight range that reigned through most of August (when quotes on best-execution 30-year loans were bound between 3.375% and 3.5%). As we write, we’re more likely to see best-execution quotes of 3.5% or above.

It’s no surprise that mortgage rates moved higher; many debt-security yields expanded this week, most notably the yield on the 10-year U.S. Treasury note. As you may know, the 10-year note holds significant sway over mortgage-backed securities, which hold significant sway over mortgage rates (long-term rates in particular).

The yield on the 10-year U.S. Treasury note spiked 10 basis points on Tuesday after Richmond Federal Reserve Bank President Jeffrey Lacker added his support for raising the fed funds rate sooner than later. The pro-interest-rate-hike contingent of Fed officials is growing. Several regional Fed bank presidents (like Lacker) now believe that implementing a series of small interest-rate increases would be good for the economy, even if the economy continues to post sub-standard growth. (By the way, Fed Chair Janet Yellen isn’t one of the supporters.)

A rate hike this December appears more likely this week than last week. Traders in fed funds rate futures contracts now are betting a 64% chance a rate increase will occur in December. (Some are even betting there’s a chance for a rate increase in early November at the next Fed meeting.)

This is all rather new in the annals of the Federal Reserve’s 113-year history. That is, Fed officials publicly guiding markets on interest-rate policy.

Before the 2008 financial crisis, Fed officials were a reticent lot. There was little foreshadowing that a rate increase or decrease would occur or what the amount would be (though you could glean what Fed officials could do by vetting the same data they vet.) In the good ole days, before the 2008 financial crisis, Fed officials were mostly supporting players on the financial stage. Today, they’re lead actors: Any utterance by a Fed official produces a meaningful swing in interest rates.

Accurately forecasting mortgage rates is a difficult enough proposition. It’s all the more difficult when a Fed official can change the outlook with an off-hand remark to the media. How often over the past three years has a Fed official hinted that a rate increase was imminent only to see the rate increase postponed? More than we can count.

That said, as difficult as it may be, we’ll keep forecasting anyway.

 Information provided by Jessica Regan.

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