Investors' expectations shift, mortgage rates jump
The Federal Reserve is trying to talk mortgage rates
higher. But the weather did a more-effective job.
Rates rose this week because investors worried that
the back-to-back hurricanes in the Gulf of Mexico could lead to
inflation caused by higher fuel prices. That's a switch from just
a couple of weeks ago, when investors and economists talked about
higher fuel prices depressing economic growth, curbing inflation
and keeping interest rates low.
Lately, there has been a shift; now investors and
economists say they are concerned that higher fuel prices could
lead to higher prices for everything. Mortgage rates went up because
of these inflationary expectations.
The benchmark 30-year, fixed-rate mortgage rose 9
basis points, to 5.97 percent, according to the Bankrate.com national
survey of large lenders. A basis point is one-hundredth of 1 percentage
point. The mortgages in this week's survey had an average total
of 0.39 discount and origination points. One year ago, the mortgage
index was 5.75 percent.
The 15-year fixed-rate mortgage rose 8 basis points,
to 5.58 percent. The 5/1 adjustable-rate mortgage rose 13 basis
points, to 5.59 percent.
Warnings from the Fed
Concerns have been building about the inflationary effects of high
fuel prices. This week, Federal Reserve Governor Susan Bies told
reporters that the longer energy prices stay high, the more likely
will be the impact on prices in general.
Her colleague, Janet Yellen, delivered a similar message this
week, while drawing the distinction between short-term and long-term
inflation. Yellen, president of the San Francisco Federal Reserve
Bank, spoke in London this week to members of the parliament, and
said: "There is a chance that core inflation may be raised
for a time, as a part of the rise in energy prices gets passed through
to other goods and services. However, a more-persistent increase
in inflation, such as was witnessed during the 1970s, seems unlikely
as long as inflation expectations remain well-contained."
And how do the people at the Fed contain inflation expectations?
By raising short-term interest rates, threatening to keep raising
short-term rates, and complaining that long-term rates are too low.
In her speech in London, Yellen said she wouldn't be surprised
to see inflation actually fall in the next two years. Why? Because
the Fed "cannot take it for granted that inflation expectations
will remain well-contained."
Read that again and savor the circularity of the argument: Inflation
might fall because the Fed cannot assume that it will fall. It's
the monetary version of the adage that the price of peace is eternal
vigilance. As Yellen said, "it is the job of a central bank
to earn, through its actions, the public's confidence in its commitment
to price stability."
More rate increases coming
That's a strong hint by an alternate member of the rate-setting
Federal Open Market Committee that the Fed intends to continue raising
short-term rates to keep inflation away.
In the past, the Fed would raise short-term interest rates, and
long-term rates would follow. Not so this time around, and it seems
to frustrate Fed Chairman Alan Greenspan.
In a speech to the American Bankers Association this week, Greenspan
noted that the 30-year mortgage rate has dropped about half a percentage
point during the same time that the Fed has raised the federal funds
rate from 1 percent to 3.75 percent. "This decline in mortgage
rates and other long-term interest rates in the context of a concurrent
rise in the federal funds rate is without precedent in recent U.S.
experience," Greenspan said.
Translation: He expected long-term rates to rise. He wanted them
to rise. But they didn't.
Warning: Infectious euphoria
Greenspan still wants long-term rates to rise. A day after his speech
to the bankers, he spoke to a group of economists and lamented that
the Fed's success at inflation-fighting carries its own risks --
namely, a reduction in "perceived credit risk and interest
rate term premiums." That's another way of complaining that
long-term rates are too low.
Greenspan added that periods of low rates have inevitable
reversals, resulting from "the all-too-evident alternating
and infectious bouts of human euphoria and distress, and the instability
Today's low interest rates are all in your head, Greenspan is
saying. They're infectious euphoria. And someday you will be cured.