Interest Rate Predictions: The Only Factors I Look At

16 Aug

Interest Rate Predictions: The Only Factors I Look At

By Doug Goelz, Mortgage Services

Years ago, I worked for a major commercial bank with a large economic departmentthat would regularly publish interest rate forecasts. After tracking the forecasts for several months and comparing past forecasts with current rates, I was impressed with how wrong the forecasts were.  Of course, it was easy to see, in hindsight, why the rate forecasts where wrong: the economic department could not foresee events that ultimately impacted future interest rates.

And that’s the point: interest rates today are affected by events around the world that cannot be predicted.  So, when I see forecasts stating that rates a year from now will be ________ (you fill in the blank), I ignore them.*

Instead, I watch events and news that may impact rates in the very short term (say, in the next 10 days), and look for the situations that might push rates one way or another.  Here are my simple bellwethers of rates in the nearterm:

  • National economic news. If the economic news is good, this puts upward pressure on interest rates.  With a thriving economy, more people want credit; with more demand, the cost of credit (interest) rises.
  • Government reports and statistics. A lot of economic news is conveyed through government statistics and reports.   When the statistics are better than expected (for example, unemployment has decreased, or businesses are buying more durable goods in anticipation of increased business), rates tend to rise in the short term.The impact of governmentreports on mortgage rates can be immediate.  If a report is published indicating an upturn in the economy, banks often will ratchet up interest rates within minutes of publication.
  • Indicators of inflation. For example, a published increase in the Consumer Price Index (CPI) means that prices have gone up, the very definition of inflation.  With inflation, rates rise.  National news about price increases (for example, a rising price of crude oil) also may trigger upward pressure on interest rates in the near term.
  • Pronouncements by the Federal Reserve Bank. Fed meeting minutes and speeches by officers of the Fed are generally published, and news reporters and economists scrutinize them for any hint of the Fed’s plans for changing the Fed discount rate. In general, as the Fed discount rate moves, so move mortgage rates.  If the Fed indicated they were going to raise their rate in 3 months, mortgage rates would jump immediately.
  • World economic news. As national economies around the world thrive, the demand for credit increases and rates rise.  An article in a US national publication about, say, increased growth of the Chinese economy can lead to upward pressure on rates in the US.
  • World events (especially bad news). When terrible things (especially those caused by human beings) happen around the world, it can be good for US mortgage rates.  A terrorist act, an unfavorable political change, or an armed conflict somewhere else in the world can all mean that the US is even more attractive to global investors as a place to invest their money.   If an event occurs somewhere that might spur world investors to want to move their money to the US, the event can cause downward pressure on rates.
  • Widespread speculation about any of the above.If there are reports of the possibility of inflation, or the likelihood of a boom (or bust) of a foreign economy, or any threat (or promise) of a change in the economy before the facts are in, bond markets (the source of interest rates) can react immediately. For example, talk about inflation can have the same impact on interest rates as actual inflation.

All of these indicators above can give an indication of where rates are going in the near term.  And if no other factors change, the thing which causes rates to increase in the near term can also cause them to increase long term.  For example, if a monthly government report indicates prices went up last month, price increases may continue for months ahead.In reality, though, so many other unpredicted factors can impact interest rates between next week and next year.   Guessing what all these factors will be a few weeks into the future really is looking into a crystal ball.

In the mortgage business, I stay focused on what rates are right now and take into account factors which may impact rates next week.   I learned long ago that trying to forecast interest rates very far into the future is just guessing.

* By the way, I don’t ignore interest rate forecasts stated in terms of “If X happens, rates will rise,” or “If Y occurs, rates will fall.”   These kinds of forecasts at least explain the economic forces that can impact rates, without stating that the events themselves, and the resultant change in rates, WILL occur.

Questions?  Feel free to get in touch with me at 415-730-4665 or