Rising Rates and the Coming of the Next Resession
At the end of November, a number of public bank figures stepped out to make statements about the coming months and the direction of the Fed going forward.
There was a good deal of back and forth, as there always is with these things. But in between the hemming and hawing, two interesting pieces of information came to light. First, the Fed is planning to raise rates this month, for the fourth time this year.
The Fed expected a significant downturn in the economy, at least temporarily, following the hurricanes in Florida and Texas. But recovery has been quick, and the economy has remained strong-ish. Terry Sheegan, an economist at Oxford Economics, admits that the economy is “not brilliant” but that it is “chugging along” at a rate that can sustain a rate increase at this time.
Secondly, the Fed and central bankers have some concerns about a potential coming recession. The economy is recovering, but there is a lot of instability, especially coming from DC. That instability could very well plunge us into another recession within a few years. At the moment, bankers are worried they may not be able to fight another recession.
Typically, when the economy is in a downturn, the FED can cut interest rates on short-term loans and the like, usually to the tune of 5 or so percentage points. Unfortunately, the current rates are only just above 1%, and aren’t expected to rise above 3% until at least 2020. Simple arithmetic gives us a good look at the problem here.
The Fed has been making a hard go at getting the inflation rate above 2% since the end of the Great Recession, but the rate has been stubborn, hanging out just below the target number. The balancing act here is tricky. The market can sustain an interest hike, but for how long? And once it can no longer sustain the rates, what then? The rates can’t be slashed too much, or banks will find themselves paying interest to their own borrowers. Obviously, we exaggerate. No bank in its right mind is going to start paying out interest on its own loans. But the point is made in full.
Banks must find a way to balance the now with the forecast of the future. Give the economy what it needs this moment while still insulating themselves against the potential recession to come. Atlanta Fed President Raphael Bostic seems optimistic that the recent leadership shift in the Fed may help the central bank rethink its’ core strategies.
“The new guy comes in and they are able to really think about, how should this work, how do I think this should work and is it compatible with where we’ve been and where we are trying to get to,” Bostic said.
So perhaps these moves by the Fed can come under the scrutiny of new leadership that will help ensure the Fed is headed in the right direction.
What Does it Mean for Mortgage Investors?
For folks looking to seller finance property and carry back paper, this rate increase can mean big things. Typically, those carrying paper on a property charge a few points above the national rate in terms of interest, so those wishing to seller finance may be able to work this to their advantage.
For those who already carry paper, Interest rates are about to go up, meaning it may be a good time to sell to a mortgage note buyer and reinvest at a better rate of return before the economy takes a downturn.
The main takeaway here is that the Fed is making a hard attempt at balancing the cautious with the aggressive. Hopefully this strategy will play out into a healthy recovery should the country fall into another recession, or even help us avoid one altogether.