We can all agree that accurately predicting the future requires at least a brief reflection on the past. Looking back at the most recent economic cycle, many of you may remember the concerns of a “double-dip” recession that many economists spoke of less than 12-months ago. A recession means a contracting economy, which begets fewer buyers of goods and services, which then causes deflation. Concerns about the economy were paramount in the spring, summer, and early fall of 2010. During these months, the results of those beliefs were visible as investors pursued the relative safety of US Treasury Bonds and mortgage bonds offered by Fannie Mae and Freddie Mac. The increased demand for bonds caused the 30-year Fixed Rate Mortgage to reach historic lows by October 2010.
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The Federal Reserve Board of Governors, chaired by Ben Bernanke, announced their formal plan for Quantitative Easing II (QE II) in an effort to create inflation, lower the unemployment rate, and boost stock prices. Has it worked?
The short answer is yes, as evidenced by core inflation seems to be steady at 1%. Some increased commodity prices are beginning to impact producers (i.e. manufacturers) and this will eventually find its way to the consumer’s pocket. (NOTE: The Fed would be more comfortable with a 2% CPI, so there’s more easing to come.)
The unemployment rate is stuck above 9% and will likely remain elevated for some time. However, the economy added more than 1 million private jobs in 2010 and is expected to add even more in 2011. More easing is possible if the unemployment rate remains stubbornly high. Equities as measured by the DJIA, S&P 500, and NASDAQ are up in excess of 10% since the middle of October 2010. 4th quarter earnings are in from nearly all of the major companies in these indices, and it appears that Corporate America is on relatively sound footing.
In my next post we will examine how QEII will affect mortgage interest rates.
This mortgage moment is brought to you by Eric Clonch, Mortgage Loan Consultant at Beverly-Hanks Mortgage Services in Asheville, NC. For questions or comments about this article, please contact Eric via email at [email protected], or by phone at (828) 654-6402. NMLS# 327193