We all know we are living in unprecedented times. While many of us thought the same in 2008 amidst the financial crisis, we find ourselves in uncharted territory yet again a little more than a decade later. The difference between now and then is the global pandemic spreading like wildfire leaving chaos, devastation, and uncertainty in its wake. The problem of uncertainty is driving much of the volatility we are seeing in global financial markets as well as what we have seen with mortgage rates over the past few months.
Although there has been a great deal of buzz around the news that the Federal Reserve intends to keep the federal funds rate at or around 0 through the year 2022, the future of long-term interest rates is much more uncertain. It is important to keep in mind that the fed funds rate, the rate at which large financial institutions borrow money overnight from the federal reserve, has almost nothing to do with long term rates. Long term rates on the other hand, including mortgage rates, and defined as government bonds maturing in ten years, will continue to fluctuate and experience volatility based on:
- Economic outlook
- Supply and demand
In the past two weeks alone for instance, we have seen mortgage rates pinball on the changing tides of economic outlook. By last Thursday, rates were at all-time lows based on the news that the Fed would continue purchasing mortgage backed securities, while the week prior strong economic data in the form of surprising and promising data from the jobs report brought about a spike in mortgage rates. This is the kind of movement we can expect to see for the foreseeable future as we work toward a new normal. Unfortunately, there is no telling how long until we get there but, in the meantime, we can be certain that markets, interest rates, and mortgage rates, will be driven largely by COVID-19 numbers.
As states re-open, if COVID-19 numbers begin improving we may see rates gradually increase, however if there is an uptick in cases or we see a resurgence in the pandemic this fall or heading into winter, it is likely that rates would remain low and could possibly sink even lower. Additionally, the Federal Reserve has purchased $2.1 trillion in treasury bonds and mortgage backed securities since march. Last week they announced they would continue purchasing at the rate they have been for as long as needed. That commitment drove rates lower and will continue to depress rates as long as the Fed continues to purchase MBS.
It is also important to note, and something that hasn’t seemed to gain much traction in the media yet, is that on Monday June 8, the National Bureau of Economic Research announced that as of February, we have officially entered a recession. Typically, during a recession rates will remain low and it is likely we can expect the same for the duration of the current recession we are in. That being said, the current recession is the direct result of the COVID-19 pandemic and experts have indicated there is the possibility it may be more brief than previous recessions, as a result.
With so much uncertain about the future in regard to the pandemic and the global economy, I think it is safe to say not even Fed Chair Powell himself can accurately predict where rates are headed, there are just too many unknowns. At this point the best we can do is continue to monitor COVID-19 numbers and take cues from key economic data as an indicator of the strength of the economy and where we are in terms of recovery, these will be our best tools in predicting where rates may go in both the near term and long term.