The Fed should heed Wayne Gretzky’s wisdom today. On the day Silicon Valley Bank went bankrupt, mortgage rates decreased significantly as investors fled into U.S. government bonds for safety. Of course, every bank must properly manage interest rate risks to prevent themselves from facing similar fate as SVB.
Government-guaranteed assets will then become available, providing VA, FHA and most conforming mortgage investors with assurance they will recoup their money. Over two days, average 30-year rates dropped from 7% to 6.5% – meaning monthly payments on an average-sized mortgage were reduced by roughly $100.
More decreases could occur. Consumer price inflation has begun to slow; it was running at 9% by mid-2022 before showing some improvements to reach 6% by February’s data. Before the Federal Reserve can declare victory, inflation should reach 2%; this goal still lies two years away, although reaching 3-4% inflation by year’s end appears likely. Although egg prices can be disconcertingly expensive, the real issue lies with housing costs: eggs only account for 0.2% of an average household budget while shelter expenses comprise 34.44%. Rental costs have continued to increase at an 8.8% annualized pace; however, various private sector apartment data shows actual rent decreases. Furthermore, construction of apartments has reached its highest point ever for four decades; more vacant units will soon appear and decelerate rents–possibly even sharply–thus potentially slowing rental increases down further.
Due to projected rent projections and their delayed effect, Fed actions must follow Wayne Gretzky’s maxim of “go where the puck will be.” In other words, raise interest rates no longer.
One key question remains. Are U.S. bonds the safest asset? The national debt has seen its debt level steadily climb towards $30 trillion; while default may be unthinkable, higher borrowing costs for all including government might occur if Washington cannot resolve its issues quickly enough.
