Media outlets are abuzz with news about The Fed’s new commitment to keep rates low pretty much forever and to also change its inflation targets.
This WSJ article is just one of many I saw today discussing this.
So what does this mean?
The Fed will no longer give credence to what is called the “Phillips Curve.”
This is a largely debunked belief that high rates of employment result in inflation.
B/c the Fed used to adhere to that belief, they often raised rates at inopportune times (in an effort to prevent inflation) and unnecessarily stall economic growth.
So, it is probably a good thing that the Fed is now less likely to raise rates when things are humming.
But, the Fed is also revising its inflation target. The Fed formally tried to always keep inflation under 2% but now it will focus on an “average” of 2%, allowing for more fluctuation.
What this all really means is that the Fed is going to “try” to keep rates very low for a very long time without worrying as much about inflation – something we all already knew (but now it is just “official”).
But, there are problems.
First of all, few people can even define inflation nowadays, let alone predict and control it.
I blogged about this last month, pointing out how we’ve actually already had tremendous “asset inflation” even though technology is keeping consumer price inflation tamped down.
Another problem has to do with what too low of rates do to an economy, or in the words of a WSJ editorial today: “Research suggests sustained low rates can dent an economy’s growth potential by steering investment to unproductive uses, sustaining zombie companies, rewarding corporate financial engineering instead of capital expenditure, and contributing to asset booms and busts.”
The Fed claims it is doing all of this to help rank and file workers by sustaining a strong economy, but, to again quote the WSJ, “The result is almost certain to be more financial manias, panics and crashes.”
So, those of us in the mortgage and real estate industries can cheer, for awhile at least, as this new policy will no doubt bolster our industries…for a while at least.
In other words – we should also all save our money and count on more booms and busts.
As a plus for our clients though, the new policy probably makes inflation much more likely which in turn makes real estate an even more enticing bet (b/c it is such a good inflation hedge).
And lastly – can the Fed actually keep rates low – forever?
I doubt it, as we have seen rates increase in recent weeks already in response to good economic news, and we will likely see them spike again when the COVID crisis ebbs and/or when stronger inflation signals surface.
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