The Fed’s dilemma

With summer right around the corner, the real estate and mortgage markets are enjoying volumes not seen since early in the last decade. All this could change soon if the Fed decided to raise rates at their upcoming meetings.

The Fed has a dilemma on its hands. Either they raise rates and risk slowing down a very modest economic recovery or they keep the rates low and risk that they won’t be able to stimulate the market by lowering them again if we hit an economic downturn.

Let’s face it, if our economy was doing great, mortgage rates would not be below 4 percent. That is just not a normal interest rate market. The Fed has only raised rates once, in December of 2015, in the last nine years.

Raising rates would help them for future recessions or downturns but this could also cause another real estate or asset bubble. The last big economic cycle, the economy seemed to be slowing down and the Fed starting raise rates. This brought us to the great recession that we are still trying to come out of today.

By keeping rates low, the Fed could continue to fuel this weak economy. Experts say that this could spark inflation, which is viewed as bad, but deflation is worse. All these so-called experts should really look to our very near past and see that the lesser of two evils here is to get the economy going red hot! Inflation is a lot easier to battle by raising rates. Deflation is extremely dangerous and can leave the FED with little to do.

Some of the Fed presidents talk up the fact that all their decisions are data dependent. So if they think things are getting better then they will raise rates. The low rates have also fueled the stock market, so the Fed also worries about what happens once there once they raise rates. Does the Dow Jones begin a correction or not?

The Fed has too much invested in this recovery. They have kept rates low and have purchased over $4 trillion in bonds to keep treasuries and mortgages rates low. Inflation will begin to rear its head if our economy is going better. Is that not what we are shooting for? A better economy.

Chairwomen Yellen, stay the course and may the market forces eventually take over.

To contact me, call 773-557-1000 ext. 15, e-mail ron@ronmortgage.com or visit http://www.ronmortgage.com.