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Interest Rates, Inflation and the 2022 Outlook

Interest Rates

I’ve got a couple of webinars coming up this next week that will give a forecast on interest rates, inflation, and the economy for 2022.  January is almost over so they should be saying, “the rest of 2022.”

One of the speakers for one of the webinars is Henry “Hank” Paulson, the former Secretary of Treasure under the Bush administration. You might remember Paulson from his high profile during the financial crisis of 2008-2009.  He was instrumental in helping the Bush & Obama administrations “pitch a save,” if you can call it that when the economy tanked after the mortgaged industry disaster.   Paulson was also the former chairman of Goldman Sachs.  He still maintains a high profile in the financial community so it will be interesting to see/hear his take on where we are now. 

Since I promised my opinion on interest rates and the fundamental structural problem with inflation, I thought I would share that now, before the “professionals” give their opinions or guidance.  Not they would give a shit what I think or that my opinion will be in line with theirs. I can promise you will agree on very little.  That’s probably why they make the big bucks, huh?

I’m not gonna spend a lot of time on inflation. I overcommitted on that. I always overcommit on topics I wanna hit. You would think I would know how wordy I can be and that I can never cover all I wanna cover by now but, I haven’t learned, yet! My goal in future posts is to only pick one topic and (try to) do shorter posts. 🤷🏾‍♂️.

Let me do my disclaimer now then I’ll give you my opinion on rates before I get into some of the why so if you don’t wanna read this whole post, you won’t have to.

Here’s the disclaimer! I’m not a financial advisor and I don’t give financial advice.  This post is only my opinion. It, in my opinion, is worth about a quarter, ok a nickel.  I know some really good financial advisors if that’s what you’re looking for.  One of my good friends who is a financial advisor is hosting a Zoom seminar that you should attend.  Look at some of my posts within the last couple of days and you will see the info and the link.

Now, my opinion on interest rates? The Fed has already said they’re going to raise rates this year. What they said was they expect to raise rates three times. They didn’t say by how much or when.  The first hike is not supposed to come until around March.  Why would they push the first rate hike out until March? Inflation is jacked up now.  Why announce some shit that’s not gonna happen for 2-3 months?  I’ll try to explain.

Let me say something before I give you, my rate forecast. It’s kind of a teaser but I don’t want you to go off half-cocked.

There are two kinda rates you want to pay attention to, one is short-term rates which will largely be driven by action(s) the Fed takes. These are rates for car loans, credit cards, and other consumer credit, excluding most mortgages. Once I give you what my prediction is gonna be I’ll distinguish short-term rate drivers from long-term rate drivers or mortgage interest rate drivers.  I’ll keep it simple, but it is important to know the difference in the rate drivers. Then, I’ll give you my mortgage rate forecast.

Oh, yeah Imma get into why you should care and why I keep bringing the topic of interest rates up.

So, for my Fed rate predictions.  I think the first-rate increase for the Federal Reserve is going to be .25%. I think the 2nd increase will be .25%.  The 3rd rate increase is going to be contingent on how effective the first two increases have been on inflation.   The 3rd increase won’t happen until December, after the midterm elections and that’s because there will be no way to determine the impact of the first two increases sooner than that.  That delay in the 3rd rate increase is not political but the timing of the first two are, in my opinion.

A buncha mumble jumble? I agree but if you hang with me, I’ll explain what some of this means. I’ll help you understand what you’re going to hear on the news and help you wade through some of the bullshit. I went through a lot of what the Fed does and what its role is in our economy. I’m not going to repeat that. I’ll put this post up on my blog and insert a link so you can read it if you like. It was a blog post and not a FB post.

Mortgage loan rates have already increased, and they will continue to increase throughout the year, not because the Fed will be increasing short-term rates but because inflation will continue to increase.  I’ll explain why.

Here’s your takeaway if you don’t have the patience to read this entire post.  If your 2022 plans, your financial plans included any interest rate sensitive “thing” the longer you delay it, the more it’s gonna cost you.

If you’re planning to buy a house and the interest rates increase on you, you may still be able to buy a house, but maybe not as expensive of a house as you had planned. I’m not giving specific examples. The news is reporting examples, after examples of specifics on what incremental rate changes will do to your monthly payment at specific price points. That is happening daily so catch any national or local news channel and the financial segment will give you a good example.

Back to the Fed and their planned rate increases but let me digress for a minute. Idk if you care or not let me squeeze some commentary in.

I had a couple of folks ask me, “why you talk about interest rates so much” and another asked, “how did you get out front predicting the Fed was going to increase rates? You were the first one saying that.”

On the first question, this is going to seem like an exaggeration, but interest rates are one of the major drivers of wealth, for all of us, rich and poor alike. Think about it, the more you are spending on “interest” the less you have to spend on other shit. Interest doesn’t translate into ownership. Idk how to make that any plainer. Interest is like rent. You pay it out and you get temporary satisfaction of “being.” Not saying it’s bad, because in some cases, it’s a path to owning the shit you want.  But, the more interest (rent) you pay, the longer it takes you to get to ownership.  So, lower rates get you to ownership quicker.

On the 2nd question, how did I beat the “experts” in predicting the increase in rates? The answer I gave is, “I’m old.” I have been doing this for a long time. The other thing I said was I ain’t selling shit. Let me explain both of those and I’ll be brief. Lol, I will.

I’ve been in some aspect of financial services for over 2/3rds my career, almost 25-30 years. Most of that time has been directly engaged in selling financial products or managing financial products. To be decent at it, I have needed to pay attention to what the Fed does or might do. I understand what the Fed is supposed to do from my college minors in finance and economics.  I once told somebody that I’m geeky. I am. Lol.  I read a lot of the data produced by the Fed and a bunch of articles on trends and impacts of Fed actions and those of some of a lot of large-company CEOs.  After years of doing that, the “what next” becomes clearer.

Insofar as selling “shit” goes, my job doesn’t require me to support a company line, pitch a product, or support an industry. I don’t have to worry about what’s going to happen to the “market” based on something I said. I’m not gonna get fired because I put out an unpopular opinion or that I’m just wrong!.  Hell, I don’t even originate residential mortgage loans anymore, so I don’t sell direct to consumers anymore and even when I did, it wasn’t selling to be selling, it was much more of an advisory role, which I was licensed to do at the time😅.  

With all that being said, I’m free to share my opinion, without consequences.  It’s an informed opinion, maybe not as informed as “the experts” but they have severe consequences for being wrong; I don’t!

Now, back to the Fed rates. As I mentioned, I explained what the Fed does and how in a post a year or so ago. But, in short, the Fed loans to banks or it buys and sells securities to banks which has the effect of putting money into the economy or taking money out. Low rates and putting money in the economy make it easier for banks to lend money for us and businesses to buy stuff. More money in drives activity up and prices up. Higher rates and taking money out of the economy slow activity which should drive prices down. That’s the theory, except when you have the structural issue with the supply chain that you have to layer on top of an economy that’s been flushed with money. Let me kinda clean that up.

Inflation can be simply be defined as “too much money chasing too few goods.”  What the news and the experts are putting out there is that “the supply of money” is what’s driving the demand and pushing up prices.  That’s some of it but I think too little weight is being given to the “real” shortage of shit to buy.  The supply chain is broken, partly because of the RONA or at the RONA exposed it but that’s not the whole story and it’s not going to be an easy fix. 

You’ve heard news reports saying that supply chain issues are “transitory” meaning they’re temporary, right?  I call bullshit! They’re not transitory or the best way to say it is probably that “temporary” is gonna be a little longer than next week, a lot longer.

I said I was not going to touch on the structural issues of inflation, well I said a wasn’t going to spend too much time on it.  That’s it. That’s all I’m going to say about it but please note, the Fed increasing rate is not going to fix this “transitory” issue with the supply chain. At best, what the rate increase will do is slow the economy down enough for all the “transitory” issues to pass.  The slow down is going to last longer than a “transition,” in my opinion only!

As I mentioned earlier you will see the rates on variable loans, like lines of credit, go up. You will see car loans and credit card rates go up. The rates for business loans will go up as well. Business loan rates have already started to increase.  The Fed rate and similar rates (LIBOR) are wholesale rates meaning banks layer a “margin” on top of these rates to make the loans I just referenced.

That was kinda choppy? I’m sorry but I already did a post about this, so I just don’t wanna be guilty of repeating the SOS.

Let’s talk about mortgage loan rates or long-term rates.  I don’t think I’ve shared this with you., hmm at least not from this angle.

Most mortgage rates, particularly fixed-rate, mortgage rates are driven by the 10-year Treasury Bill. Some mortgage rates use the Fed rates or other short-term interest rate indices as the basis for their rates.  But since we have been in a low-interest environment for so long, there are very few ARMs or variable rate mortgages. 30-year, fixed-rate mortgages have accounted for over 75% of mortgage loans for, maybe 15 years or so?

Hang on. Imma make it simple so don’t let your eyes glaze over, not yet.  This is the part you need to understand, a little bit, so the news will make sense.

Treasury bills, notes, and bonds are what the US government uses to borrow money. Imma includes a link in the comments from a prior post, so I don’t repeat the SOS.   Put a pin right there.

Ten-year notes and longer-term bonds are long-term, fixed-income securities. Oversimplified, what that means is that the income for these bonds is fixed, it doesn’t change. If inflation is on the rise, the income from these notes and bonds will buy less. To compensate for that loss in value or buying power, the “rate” of return on the bonds needs to be higher. So, the rates on mortgages indexed to them will increase too. The thing is mortgages are long-term securities. They are essentially bonds too!  The rate is not tied directly to the Fed rate. The fact that they may increase at the same time is only because they’re reacting to the same thing, inflation.   The reason mortgage rates are increasing ahead of the increase in Fed rates is because the two are not tied together.

I hope that makes sense cause I’m going to give you my forecast for mortgage rates now. I think a 30-year fixed-rate conventional mortgage will be in the 5.0% range before the end of the year. That is huge since they have been in the mid to high 2%s to low 3%s for the last few years.   I have seen forecast talking bout they will be in the mid to upper 3s by the end of the year.  Hell, they’re already at the point, depending on your credit.

This is major!  It going to know some people out of the housing market.  House prices have gotten so expensive in many markets that will be no house that some people can afford, period!  This post is not about housing, per se, so I won’t talk about DFW, Austin, Seattle, San Francisco, or Phoenix.

The hope by the Fed is that the increase in interest rates will choke off some of this inflation. I do not think the Fed is prepared to go as hard as they need to; I think they’re underestimating how long inflation is going to be around.  Inflation is going to with us and it along with a bunch of other stuff is going to bite Biden in the ass. He might want to have a long conversation with former-President Jimmy Carter.

This is my last comment/thought, at least about inflation and interest rates until like June or after the 2nd Fed rate increase. I am going to watch what happens and see how what I think lines up with what the “experts” think versus what happens and reality.

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