Rates are Still Good

Last week we learned that consumer prices jumped 7% in December from a year ago. That was the eighth straight month of an inflation figure higher than 5%, and the third consecutive month above 6%. It is the biggest annual increase since February 1982. Sovereign Lending Group’s loan officers are well aware of what this means.

We explain to our clients that the Federal Reserve does not set mortgage rates, but the same factors influence its decision making as well as mortgage rates. After listening to Fed officials over the past two weeks, it has become clear that the Fed is determined to hike the short-term rates it controls in March (primarily the overnight Fed Funds rate and the Discount Rate), regardless of what the data may do between now and then.

The market expectations seem to waffle between expecting three or four hikes this year (March, June, September, and perhaps December) and a balance sheet announcement at the May meeting. Obviously, the securities that the Federal Reserve has been buying (U.S. Treasury and mortgage-backed securities) pay off over time, and this “runoff” will increase the speed of its balance sheet reduction; perhaps the balance sheet would shrink by $50-$100 billion later in 2022.

The Fed has clearly come to the realization that it is behind the curve and has a lot of catching up to do. Thus, risks are now asymmetrically skewed toward more tightening, aka, higher interest rates. Weak data are unlikely to provide much relief, while strong data should push the market to price even more hikes, albeit further out the curve rather than in 2022.

Inflation is in restaurant meals, at the gas pump, in the liquor store. It is in the headlines and everywhere we turn. The higher the inflation rate, the more interest rates are likely to rise because investors and lenders like Sovereign will demand higher interest rates as compensation for the decrease in purchasing power of the money they are paid in the future. Put another way, if you, or a big money manager, is only earning 3 percent on your money, and the inflation rate is 7 percent, you’re losing money. When you lend money now, the prices of goods and services may go up by the time you are paid back, so your money’s original purchasing power would decrease. Thus, interest protects against future rises in inflation.

Sovereign Lending Group can’t change the economy, but we can help our clients take advantage of mortgage rates that are still low. There are millions of homeowners out there with 2-3 percent fixed-rate mortgages but with huge amounts of equity that may need to be accessed. We can help you access that. The cash-out refinance options that Sovereign offers are helping our clients every day. Talk to your Sovereign loan officer about ideas!