Rates have increased a full 1.0% since December 3rd, 2021. Why are interest rates going up? Of course, there is a simple and not so simple answer.
Here is the simple answer:
The FED (Federal Reserve) has a board that makes decisions on short-term interest rates. The FED plans to raise short-term rates in .25% increments. The problem is some of the board members want to increase rates “multiple” times this year while others only want to do it a “couple” times this year. Well, the market does not know what will really happen, so they are going with the assumption that rates will increase multiple times this year.
So why do they increase rates? What is the purpose?
Inflation is running extremely high at 7% right now due to suppliers not being able to keep up with the demand. When demand is higher than supply, the cost of the product increases. When the FED increases short-term interest rates (think credit cards & car loans), they slow down the flow of money because people will not buy as much if the cost of that money to buy the product increases. Think a 0% car loan vs a 5% car loan. There will be considerably fewer cars sold in that scenario.
So, slowing down the demand means you slow down the inflation. At least that is the theory.
The issue is with new economic data being released shows buyers have already slowed demand, likely due to the higher costs. So the economy is actually slowing down without the FED’s raising short-term rates. Now we have a conundrum! If numbers continue to come in showing demand down will that change the attitude and mindset of the FED?
Assume this does happen and The FED says we are likely not raising rates but maybe once or twice this year? That is going to be good for bonds and could be better for rates.
So the top items to watch are jobs reports and inflation reports for cost increases due to demand. Anytime The FED speaks it changes investors’ opinions of what to do.
So, the answer is nobody knows what will happen until the next FED meeting or a new economic report becomes available. The experts are saying lock in your interest rate as the outlook for rates is not positive any time soon.
Article provided by
The Johnson Mortgage Team
Travis Johnson | NMLS 170196 | GRMA 28835
Partner | Senior Mortgage Loan Originator
Cell: (404) 786-5859
travis.johnson@ResidentialFundingConsultants.com
Tyler Johnson | NMLS 189385 | GRMA 27533
Partner | Senior Mortgage Loan Originator
Cell: (678) 595-4394
tyler.johnson@ResidentialFundingConsultants.com
