Rate update: Inflation: fear or reality?

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Inflation: fear or reality?
Feb 132018
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

After rising to the highest levels in over 4 years, interest rates are catching their breath, but I think it’s temporary. As we’ve discussed, the rapid rise seems to be predicated to a large extent on fears that inflation finally will come out of hibernation. Remember that inflation erodes the value of a currency. Thus, investors insist upon higher yields when they anticipate it.

I don’t think the fears are wholly irrational for reasons we’ve discussed, but the reality is we’ve seen very few signs of inflation so far. That could change tomorrow with the release of the Consumer Price Index. This isn’t the Fed’s preferred inflation metric, but being the granddaddy of inflation reports, it’s probably the one markets watch most keenly.

Unfortunately, I’m afraid the downside risk for this report is greater than the upside gain. By that, I mean if the reported value shows even a tenth of a percent increase, rates could quickly rise another 1/8%. If the reading is level or even slightly lower than last month, it should be positive for rates, but I don’t think they’re likely to fall very quickly. Markets seem convinced that inflation is out there hiding somewhere. I think it would take a few more months of continued tame inflation readings before markets will believe again that inflation is not a concern.

So, if you haven’t locked your interest rate, floating through tomorrow carries an outsized risk. If your outlook is a couple months into the future, there’s still hope. The longer inflation doesn’t materialize to validate market fears, the better the chances rates will find a ceiling and provide us with a bounce lower.

Greenspan says rates going to climb quickly

 Interest Rates  2 Responses »
Aug 282017
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Former Federal Reserve Chair Alan Greenspan has a warning. Interest rates are much too low, and he thinks they’re likely to move higher and quickly.

In a CNBC interview, Greenspan said he thinks the bond market is experiencing a bubble with long-term rates abnormally low. The low rates are the result of Fed taking short-term rates to near zero during the financial crisis and keeping them there for years.

The Fed has hiked short-term rates 4 times since then, but long-term rates remain near record lows. Analysts cite many reasons for this including political and economic uncertainty and, most importantly, persistently low inflation.

Greenspan says he doesn’t know when rates will start to rise, but he thinks it will be soon, and once they start rising, he thinks they will rise rapidly, which could put the rest of the economy at risk.

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