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Why a Good Economy Is Bad for Rates; Why Not Leave Rates Low?

man-glass-buildingA few weeks ago, I blogged about why rates don’t always increase when the Fed announces a rate increase (as they likely will today).

The blog can be found here, and I pointed out how the markets often account for likely increases in the Fed Funds rate long before the Fed announces them.

Since that September 6th blog, rates have continued to edge up making it appear that the pending Fed announcement has continued to influence rates.

But that is not the case.

Rates have been rising recently b/c the economy is firing on all cylinders, as indicated by a variety of measures including GDP growth, Unemployment Rates, Corporate Profits, Job Growth, etc.

Strong economic signals result in higher rates b/c the markets expect the Fed to react to those signals by pushing rates higher.

The recent slate of good economic news didn’t push rates up b/c the markets expect the Fed to raise rates today; rates are going up b/c the good news signals that the Fed will likely continue to raise rates after today.

WHY WE CAN’T HAVE LOW RATES FOREVER

If the Fed leaves rates too low for too long, there are several major risks including the following:

(1) Too Much Debt: Consumers, corporations and governments will borrow too much money that they often cannot pay back, particularly during economic downturns, causing or exacerbating recessions.

(2) Asset Bubbles: Unusually low rates effectively increase the money supply, partially b/c of the excess lending and borrowing, and this creates asset bubbles that often pop with disastrous consequences.

(3) Inflation: The effective increase in the money supply often fosters inflation like we saw in the 1970s.

We saw the “too much debt” and “asset bubble” issues play out in near perfect form prior to the 2008 housing meltdown, when consumers borrowed far more than they could pay back and housing overall was the asset bubble that popped.

While low rates appear to help those of us in the mortgage and real estate industries, that is clearly not always the case. Sometimes rate increases are the best thing for all of us.

Jay Voorhees
Founder/Broker | JVM Lending
(925) 855-4491 | DRE# 01524255, NMLS# 335646