DEFLATION PREVENTING A RATE HIKE?
Here’s another reason why we don’t foresee a 2015 rate hike: Inflation, and not enough if it.
The Fed uses rate hikes to combat unhealthy inflation. This is what happened in the 1980’s, when the Fed raised rates, and inflation fell from 19% to 4%.
2015 on the other hand, has been a year of deflation. A small dose of deflation can be healthy, but too much makes things sluggish, kind of like dark chocolate. Producer prices dropped 0.5% month over month in September. Year over year, producer prices are down a modest 1.1%. However, a rate increase could add momentum to deflation, which could threaten to paralyze the economy like it did in 2008, when lower prices forced companies to lay off workers.
Because of this, we’re seeing sub-4% on the 30-year fixed-rate mortgage through the remainder of the year, and possibly the first quarter of 2016. But we again remind you, things can and do change in a hurry. If we go back to May 2013, the 30-year loan was priced with a 3.5% rate. Within a month, the rate was above 4%.