Interest Rates Rise Slightly

Interest rates for buying a home on the Palos Verdes Peninsula increased slightly this week.The following are excerpts from the newsletter on interest rates published by HSH Associates :

“One of these days, and probably not long from now, the Federal Reserve is going to again surprise the market in a meaningful way, causing all manner of unintended consequences. This week, the Fed did present a little different message in regard to inflation and the economy, and the market jumped, only to settle back amid an ongoing litany of global troubles.

It won’t be this way forever, where beneficial and countervailing forces keep rates from starting an upward march. For the moment, whether by inertia or other reasons, mortgage and other interest rates remain grounded.

Coming on the heels of a fresh report on Gross Domestic Product growth which put the economy growing at a 4 percent rate in the second quarter — and one where a sizable portion of the deep decline in first quarter GDP was revised away — the Federal Reserve held a meeting to discuss how to adapt monetary policy as we go along. The message which accompanied the close of the Fed’s two-day affair was more upbeat than recent Fed assessments, with the body noting that there is “sufficient underlying strength… to support ongoing improvement in labor market conditions” and, perhaps more important to the speed with which future policy changes are made, that “the likelihood of inflation running persistently below 2 percent has diminished somewhat.

In short, the economy is growing, the job market is healing, and inflation is firming. Nothing to panic about just yet, but the improvement in the assessment did spook the market a little, and interest rates on influential 10-year Treasuries popped about a tenth percentage point higher from Tuesday to Wednesday, but have since settled back. Mortgage rates should follow, but probably not as immediately.

That rates settled quickly so reveals the quirky nature of markets. As we mentioned a couple of weeks ago, any selloff in the stock market would tend to push rates down, as money comes out of equities and lands in bonds, and the downturn in major equity indexes of several hundred points this week had that very effect. It would seem that stock markets are disappointed that the firming economy might cause the Fed to pull back on support more quickly than has been expected (even if at some future date) but better to lock in profits today than risk seeing them disappear without warning. In essence, sell stocks, buy bonds (or go to cash) and get out of the way of the Fed-roiled markets for the moment.

Will the Fed actually move sooner than early-mid 2015? Possibly, as the economic data continues to suggest that a more reliable pattern of growth is forming, but this recovery and expansion has has seen a number of “false dawns”, in the words of Fed Chair Janet Yellen.

The accumulation of news of an improving economy is good news, and as the evidence mounts that the economy no longer needs the Fed, interest rates will begin to rise at some point. For at least the moment, we continue to have sufficient global troubles to keep investors on the defensive, helping to keep the lid on any increases, but those can only do so much for so long. Once stock market players come to the realization that a growing economy will be better for equity prices and their holdings in the long haul than is a loose Fed, they will also begin to shun low-yielding bonds to some degree, helping yields and interest rates to rise. While that day is eventually coming, it’s not likely to be tomorrow or even next week at this point, but it will come.

A somewhat lesser (but still important) group of reports are due out next week. This week’s Fed meeting, employment and ISM reports failed to ignite interest rates to any lasting degree, but it seems likely that more good news is on tap for the coming week. Since they didn’t fully retreat from this week’s upward bump, and with better data expected, we expect to see mortgage rates rise a little. Watch for a 3-5 basis point bump in the FRMI by the time the week is through.”

The following are interest rate quotes from American California Financial: