U.S. equity markets continue to move higher this week. The Fed chair further supported the markets with recent comments on changes in the way the Fed will target inflation and full employment. The Fed is unwavering in keeping interest rates low for longer. For the moment, there is no fear of inflation. With millions of Americans still unemployed or under-employed, zero rate interest policies are designed to spur on the investments in riskier assets, help corporate and individual borrowers refinance to lower debt service, and inflate asset prices to boost consumer and business confidence. Inflation is no longer feared by the Fed and is actually being encouraged through their policies. The bigger and less talked about fear is the threat of deflation or even worse stagflation.
With the economic activity improving and our society adjusting to living with the pandemic, mortgage rates have been moving higher ever so gradually. There are still many land mines that could drive rates lower, such as the return of major outbreaks of Covid-19 in the fall, U.S.-China tensions, an unexpected drop in equities, and the U.S. Presidential and general elections. However, as improving consumer and business data continue to trickle in, the risk seems tilted toward higher interest rates. The Fed wants inflation and the old saying of “don’t fight the Fed” can loosely be applied to where mortgage rates might head in the coming months. We remain mindful of how quickly interest rates may move if the market is surprised by better than expected positive news. We are encouraging our borrowers to take this into consideration when looking for a new home or refinancing an existing one.