Just in the last few days, since the election results, the mortgage rates have climbed up more than half percent. Here are the main three reasons for this:
FED: The anticipation of Fed’s December meeting is that they will raise the Federal Funds Rate (the rate banks pay for borrowing money overnight from Fed). Most economists think that recent positive economic indicators will enable Janet Yellen, Fed chairwoman, to finally make the move and raise rates by at least quarter percent.
TRUMP EFFECT: Second reason why the mortgage rates have gone up in recent days is because the bond market has reacted very sensitively to the stock market rally. There is a lot of money moving into equities from bonds. So as investors dump bonds, the bond prices drop which increases the yield (rates). Trump’s election fueled the equities market in anticipation to Trump’s economic growth plan, such as tax cuts, deregulation etc. etc.
INFLATION. Lastly, most investors and the stock market see Trump’s economic policies to be inflationary. Any forecast or indicator that suggests future inflation will alarm Fed to tighten and raise interest rates. Although this is a speculative reason, it certainly has its effect on the current interest rate move.
I believe the interest rates in 2017 will move higher steadily and not too far up. We may see a little pullback of mortgage rates right after the Fed’s December meeting. The rates will resume to more stable fluctuation. The recent spike is an over reaction of recent news and events.
Through the first year of Trump presidency, there will be a lot of pressure by republican controlled Senate and the President for Fed to continue to move rates higher. Janet Yellen, will continue her due course of watching the economic indicators as her primary source rather than subsiding to the pressure of outside parties. The health of the economy will dictate her decision-making. Some economists think that Fed will raise rates six times in 2017. My take is that Fed will take rather controlled and cautious approach and only raise it twice. We have not heard much from Europe since the Brexit, and I believe Europe is not out of the woods yet. We may see some trouble ahead in Europe and Asia., especially in coming years due to uncertainty of Trump’s policies and it’s effect on the global economy.
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