How America’s Current Deficit May Impact Interest Rates
At the end of this spring, the average US rate for a 30-year fixed mortgage fell to 3.23%, the lowest ever recorded by Freddie Mac in a series that goes back to 1971. At the beginning of June, the rate had climbed to just 3.61%.
The question now is: How long will these historic lows exist?
It all depends on the inflation rate, or the main driver of interest rates. As in the case of the 30-year mortgage rate, the US economy is experiencing the lowest inflation period in decades.
Source: U.S. Bureau of Labor Statistics, Board of Governors of the Federal Reserve System, FRED
Inflation is the increase in the prices of goods and services over time, and is primarily driven by four factors:
A Growing Economy
A strong and expanding economy usually means that people can get better jobs, make more money, and thus spend more.
Rising prices cause consumers to expect inflation. Consumers may choose to spend more now, instead of in the future to avoid higher costs. Expected or built-in inflation boosts economic growth even more.
Discretionary Fiscal Policy
Inflation is impacted when the government spends more or taxes less. The 2017 Tax Cuts and Jobs Act and the most recent stimulus bills in response to the pandemic are prime examples.
Excess of Money Supply
The money supply increases through either expansionary fiscal policy or expansionary monetary policy. The money supply not only includes cash, but also debt such as credit, loans, and mortgages.
The Influence Of Policy & Supply
While COVID-19 has hit the brakes on the US economy and pushed the unemployment rate to its highest level (13.3%) since the Great Depression and the annual inflation rate down to just 0.1% (May 2020), fiscal and monetary policy present a growing concern and could push interest rates higher.
Forced to stimulate the economy, the government’s 2020 budget deficit is projected to reach $3.8 trillion (another historical record), pushing the national debt to a level higher than the record set just after World War II.
COVID-19 has also exposed the vulnerabilities of complex global supply chains. This has been particularly true in the healthcare sector, where the scramble for protective equipment has laid bare the inherent risks of inventory and single-sourcing models driven exclusively by cost control.
The impact of China’s lockdown and its dominance in key areas of manufacturing have further highlighted the problem with modern supply chains. When Chinese factories closed, manufacturers struggled to pivot due to a lack of flexibility in their supplier base. One likely consequence is that global firms will diversify their supply chains in the future, instead of relying only on China.
We may also see a decentralization of manufacturing capacity, with companies looking to bring production home. While these moves will help correct some of the vulnerabilities of global supply chains, should US manufacturers bring some of their production home, the country’s higher labor costs will mean higher inflation which will increase interest rates.
Adding to these concerns is a renewed push to privatize Freddie Mac and Fannie Mae; the government-sponsored agencies created to provide liquidity to the mortgage market. While the proposal still has a long way to go, if successful, it would result in higher loan fees and higher interest rates.
Can We Help?
With current rates at historical lows and an uncertain future ahead, it may be the best moment for you to refinance or purchase a new home.
Julie and her team are ready to help. With two decades of experience, expert market insight, and access to a qualified network of mortgage lenders, our team will ensure the success of your next move.
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