Nov 042015

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By G. Steven Bray

I expressed concern last week that the Federal Reserve would hint at a December rate hike after its Oct meeting. In the post-meeting statement, the Fed asked, “Are we clear?” The markets responded, “Crystal.”

The Fed didn’t just lob a shot across the bow. It went for shock and awe. It seems the Fed had decided to raise rates in Sep but got scared due to the Chinese stock market collapse. Now that the crisis has receded, the Fed seems determined that it will not waver again. What credibility it has left is on the line. I don’t think economic data will matter much over the next month. The Fed is going to raise short term interest rates, and markets are pricing in that probable reality.

For the near term, mortgage rates are off their recent lows and probably won’t test that range again anytime soon. Longer term, you have to remember mortgage rates are more sensitive to expectations for inflation and economic growth. Inflation remains almost non-existent, and world economies are slowing. If economic malaise returns to the US, mortgage rates could revisit all-time lows next year.

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