This past week from recent lows, home loan rates edged higher, and the 10-year yield ticked back up to 1.68%, off the lower rates seen recently.
It was all about the Fed's policy response, the Administration, and the subsequent market response. Let's break it down.
"No, it's not time yet." - Fed Chair Jerome Powell
The Federal Reserve met this week and essentially said they are "not even thinking about thinking about" raising rates or tapering their bond purchase program.
They said inflation will rise in the coming months, but the increase will be "transitory" or temporary. Ironically, the Fed used the same terminology to describe persistently low inflation for the previous decade.
Let us hope the Fed is right this time and that any rise in inflation is only "transitory," as any meaningful and sustained inflation would be bad for the economy, the financial markets, and rates.
American Family Plan Unveiled
This past Wednesday night, President Biden announced some details of the American Families Plan. For those keeping track, this $1.8T plan, coupled with American Rescue Plan and American Jobs Plan, brings the total spent to a whopping $6T.
Some of the components include free day-care, free college expense, expanded tax cuts, and direct support for those in need.
How does the US pay for this? Some will be paid by taxes, and the rest will be debt-financed with the Treasury Department selling more Treasury notes and bonds into the bond market.
What does this mean for mortgage and housing?
The new bond supply created by the Treasury must get purchased and absorbed into the bond market. That process can weigh on bond prices and create higher yields or rates. Additionally, this enormous amount of spending elevates inflation fears.
Consequently, rates ticked up Thursday morning in response.
The U.S. Economy Is Humming
Recent economic reports and corporate earnings have been strong. The vaccinations and state re-openings have bolstered consumer confidence and consumer spending and lowered the unemployment rate.
Housing remains scorching hot with record demand. It is estimated that the Gross Domestic Product (GDP) for 2021 could be as high as 8%, a historically very high figure.
If everything is so positive in the economy, do we need such an enormous policy response from the Fed and Administration?
That's the big question, and we will continue to see the market's response in the weeks and months ahead.
Bottom line: Rates have ticked up a little from the recent lows despite continued Fed bond-buying as mentioned above. Those thinking about locking in today's rates should do so.
