Federal Reserve & Interest Rates

If you decided to hold off on refinancing your mortgage, you may have missed your chance.  After hitting all-time lows, mortgage rates have crept above 5% once again and many analysts feel that it will likely stay above that figure barring a Federal Reserve move to intervene once again in the mortgage securities market.

While the stock market probably won’t see a big rally this year, many investors feel that the free fall is over and that it’s time to start getting back in.  Of course that can change in a heart beat with many on Wall Street down on earnings for the most part.

That being said, we’re seeing pressure for higher yields in the market, across the board.  For the most part that all starts with Treasury yields which have also started to climb recently in anticipation for the glut in supply once the government starts selling it’s massive debt it has accumulated over the past year.

The housing market still hasn’t recovered so it’s not out of the realm of possibility that the Fed may intervene, although for now signs point against it.  The market is forward looking and while inflation is expected to remain flat in the short term, there is the expectation of higher inflationary pressure in the long run.

Commodities have also started to creep back up and depending on how global demand reacts, it will likely determine if the Fed feels if it is safe to pump more money into the system and purchase additional mortgage and Treasury securities.

Don’t look now but mortgage rates are starting to creep back up after reaching an all time low after the Federal Reserve announced it would enter the market for mortgages securities a few months back.  The thing is, with the U.S. government set to sell unprecedented amounts of debt, many investors are concerned about the long term impacts of inflation.

Over the next two to three years, inflation is expected to remain fairly flat, however, yields on 10 year notes have climbed recently which has caused a steepening of the yield curve.  The Fed has pretty much kept short term borrowing cost down by being an active participant in the Treasuries’ market but everyone knows that isn’t going to last forever.

With this year’s deficit nearing the two trillion mark already, there are grave concerns among investors on what happens to rates once the Fed finally turns off the spigot when the economy starts to improve.  Many see the Fed raising rates at a fairly quick pace once that happens, in order to deal with the repercussions all that government debt will have on inflation.

Look, in a span of two to three years, the government will have increased the national debt by about a third of it’s total before this whole mess started.  If anyone thinks that won’t have long term repercussions on our economy, you’re kidding yourselves.

All you have to do is look at is the current state of Medicare and Social Security to see what the likely outcome will be.  The government will leave it as a problem for a later generation to deal with.

A report released by the ratings service Moody’s states that commercial real estate values have dipped approximately 21% since it’s high in October of 2007.  The report sent bank stocks tumbling as worries over future losses continue to plague the banking sector.

While commercial real estate has fared better than it’s residential counterpart thus far, the ongoing recession is clearly having a major impact.  We’re seeing a big drop in commercial real estate activity across the entire country and the outlook is for further declines as the year moves forward.

Obviously this is more bad news for banks as well as for the government, which has already spent over a trillion dollars trying to fix the banking system.  This will definitely hamper efforts to get private investment back into the mortgage backed securities market.

Even if the housing market has finally turned the corner which some people believe, if the commercial markets declines for any appreciable amount of time, it’s clearly going to delay the time frame for an economic recovery.  Many investors can’t wait for the chance to jump back into the market, I’m sure many of them are getting tired of settling for lackluster returns in Treasury securities but this just adds more uncertainty into the mix once again.

Some analysts are already critical of the government’s stress test on the nation’s largest banks and many of them feel that banks are underestimating the potential of their future losses and this report just adds fuel to the fire.