February 3, 2021
Once the recession began in December 2007 the Fed tried to stimulate the economy and ultimately pushed the funds rate almost to 0%. It remained at that record low level until December 2015
.Right after the election in November 2016 mortgage rates jumped quickly from 3.5% to 4.2% as market participants believed that President Trump’s proposed individual and corporate income tax cuts. repatriation of corporate earnings currently locked overseas, and significant relief from the currently onerous regulatory burden, would boost GDP growth significantly, boost inflation, and push long-term interest rates higher. Additional Fed tightening in late 2018 boosted the 30-year mortgage rate to a high of 4.9%.
By the middle of 2019 the pace of economic activity had moderated somewhat with growth slipping to about 2.0% but, at the same time,. the Fed began to grow increasingly bothered by the persistent shortfall in the inflation rate relative to the Fed’s 2.0% target. This resulted in the Fed cutting rates three times in the second half of 2019 from 2.25% to 1.5%, and that caused mortgage rates to slip from its earlier high of 4.9% to 3.6% by yearend.
Then, along came COVID and the government imposed a strict quarantine to, hopefully, slow the rate of spread of the virus. The Fed cut rates quickly from 1.5% in February to 0% by mid-March as the U.S. economy entered the deepest recession in its history. At the same time the Fed bought $3.0 trillion of U.S. Treasury and mortgage-backed securities. This combination of events pushed mortgage rates to their current record low level of 2.7%.
In addition, the Fed has pledged to keep interest rates low until such time as the economy gets back to the full employment level and the inflation rate climbs above its 2.0% target for an extended period of time. Those two conditions are unlikely to met be for at least another two years. We expect the 30-year mortgage rte to rise from 2.7% currently to 3.2% by the end of 2021 and 3.5% by the end of 2022.
Stephen Slifer
NumberNomics
Charleston, SC
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