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Rob Chrisman's Corner: Why the Big Move in Rates?

Donald Trump won the US Presidential Election and interest rates shot up. JMAC’s brokers and others have seen mortgage rates have been gradually moving higher since September, and at the end of last week, after nine post-election trading days, we find mortgage rates where they were in February, perhaps even late in 2015.

Markets, and people, don’t like uncertainty, and the stock and bond markets are trading off Mr. Trump’s previously stated economic policy proposals. It is believed that the new administration will be more business friendly with tax cuts, deregulation, and higher defense spending. But bonds are selling off (moving interest rates higher) because President-elect Trump has promised to impose tariffs and deliver a $1 trillion infrastructure spending package, both of which could increase the Federal deficit, and ultimately drive up inflation.

It is still expected that the Federal Reserve’s Open Market Committee will increase short-term rates in December. (In fact, the odds are nearly 100%.) But the interest rate movement that has occurred since the election represents the market’s belief that President-elect Trump’s policies will result in inflation.

This includes the $1 trillion infrastructure spending bill. Where will workers come from, given our current low unemployment, and where will the money come from to pay for the road and bridge work? Employers must pay higher wages to attract skilled workers which could lead to more inflation. And it is expected that taxes will increase.

The markets are focused on the prospect for inflation, and interest rates have increased. It’s worth noting that usually an unexpected event causes a “flight to safety” of government debt, pushing yields down. That the opposite occurred reflects fears that the deficit might balloon and inflation could become rampant. Until early January rumor and uncertainty will rule the markets.  And what could be more uncertain than guessing what policies a President who has never held an elected office?

JMAC is encouraging our brokers to keep things in perspective. The average interest rate on a 30-year loan over the past 38 years was approximately 7%. Today’s 30-year rates are in the high 3s or low 4s. It is still good!