Inflation Heating up the Bay Area Winter Months and Interest Rates

Inflation Heating up the Bay Area Winter Months and Interest Rates

So what does “Don’t fight the Fed” mean exactly, especially when it comes to home loan rates? Let’s answer that by going back a few months. In early November, when home loan rates were at all time lows, the Fed announced their plan to purchase $600 Billion in Treasuries through mid-2011. Dubbed Quantitative Easing 2 or QE2, the Fed had three goals:

1. Boost Stock Prices

2. Lower unemployment

3. Create inflation

After just two and a half months, an argument could be made that the Fed has been somewhat successful so far. Stocks are higher, the unemployment rate has improved (though more improvement is certainly needed), and as we saw last week inflation has ticked higher.

Both the Consumer Price Index (CPI) and Producer Price Index for January were hotter than expected and, as the chart shows, the more closely watched Core CPI, which strips out food and energy, came in at the highest level since March 2010. And we’re not just seeing hotter inflation here. Reports last week showed inflation is heating up in China and England, too.

So what does all of this mean for home loan rates?

Inflation is the arch enemy of Bonds and home loan rates, and usually any hints of inflation cause both to worsen. Yet, you may be wondering why Bonds and home loan rates improved slightly last week. There are two things to note: First, while last week’s inflation data was a touch hotter than expected, overall, it’s still on the tame side. Second, last week’s Initial Jobless Claims was a disappointment, suggesting that the labor market continues to improve but at a very choppy and sluggish snail’s pace.

Forecast for the week:

It’s a holiday shortened week, with both the Stock and Bond Markets closed Monday in observance of Presidents’ Day. But there will be lots of news the rest of the week:

  • We’ll get a double read on how the consumer is feeling, first on Tuesday with the Consumer Confidence Report and then on Friday with the Consumer Sentiment Index.
  • We’ll also get a double read on the housing market, with Wednesday’s Existing Home Sales Report and Thursday’s New Home Sales Report.
  • Thursday will also bring another weekly Initial and Continuing Jobless Claims Report – will this week’s report disappoint like last week’s?
  • And there’s one more double read, this one on the health of the economy. Thursday’s Durable Goods Report will update us on consumer and business buying behavior on big-ticket items that are designed to last for an extended period of time (i.e. appliances, furniture, etc). Then on Friday there’s the Gross Domestic Product Report, which is the broadest measure of economic activity.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result.

As you can see in the chart below, Bonds and rates have made some improvements since February 9. But keeping in mind the saying about the Fed…and the signs of inflation…I’ll be watching closely to see what happens next.

The bottom line to remember here…

Don’t fight the Fed. If the Fed wants to create inflation as one of its three-fold goals for QE2, it will likely succeed…and Bonds and home loan rates will likely worsen over time as a result. That’s why if you have been thinking about purchasing or refinancing a home, this is a great time to get started! Call or email me below if you have any questions at all – I’m always happy to talk to you! Or forward this newsletter on to someone you know who may benefit from today’s historically low rates.

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