CLARK: Interest rates

Last week the Labor Department reported 215,000 jobs were added last month and the unemployment rate remains at 5.3%. This gain was not as strong as the gains reported in May and June. If the rate of job growth continues, economists expect the unemployment rate to fall below the sought-after 5% level by late this year or early next year. Despite this news, the Federal Reserve’s position is it needs “some further improvement” in jobs in order to raise interest rates. Economic analysts believe it is not likely there will be a possibility of a “spoiler”.

The futures market (an auction market in which participants buy and sell commodity/future contracts for delivery on a specified future date) reflects the position by implying a September or December quarter-point increase in the Fed’s range for overnight target rates going from “worse than even” to better than even” for the first time since last month. Projected interest rates after this point in time are unknown. The futures market is acting as there will be only one interest rate increase this year; and there will be a maximum of a four quarter-point rate increase at present until the end of next year.

The Treasury market shows how vague the chances are of an interest rate increase. The yield on the two-year note increased to 0.72% from 0.43% since last year while the yield on the 10-year note has decreased to 2.18% from 2.41% for this period. This indicates investors expect average over-night rates over the long-term will still be “depressed”. Accordingly, the bond market perspective is that the Fed will find it difficult to obtain its 2% inflation target in the coming years. The issues with global economies, the strengthening of the dollar and slight wage gains (wages increased slightly or 2.1% over the past 12 months and only around 63% of Americans are employed) are contributing to the decline in commodity and goods prices.

What this all means is that banks are less inclined to lend with a “flatter yield curve”; and this suppresses economic growth and can adversely impact real estate markets. Inflation would have to rise for the yield curve to improve for banks to increase their lending risk. To this end, the Fed could stimulate the economy (i.e. willing to tolerate higher target-inflation rates).

Should the Fed increase interest rates, the increase would be relatively small. Short-term interest rates have been near zero since late 2008. Be mindful, the Fed sets short-term interest rates and not the longer-term rates (i.e. 10-year bond yields) that contribute to the determination of mortgage rates. There are, however, benefits resulting from an increase in the federal funds target rate as it increases yields on checking accounts and money market deposits.

Mary Ann Clark is a realtor with Coldwell Banker at 177 West Putnam Avenue in Greenwich. Questions or comments may be emailed to [email protected]

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