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Why Are Rates Still So Low?

Written by Posted On Monday, 06 May 2019 05:00

The Unemployment Rate is released on the first business Friday of each month. And that rate has been holding rather steady. Initial jobless claim data, those that are filing for unemployment compensation, is released each Thursday. The report released just this past Thursday showed that unemployment claims hit a 50-year low. These claims dropped by about 5,000 to 192,000. The previous week’s report showed these claims hit a 49 ½ year low.

And that’s certainly good news for the economy as more and more people are finding jobs and employers are having a bit of a difficult time in recruiting new employees. Another interesting statistic is the four-week moving average of jobless claims dropped to the lowest levels not seen since 1969. Yep, you read that right.

But what about mortgage rates? With all the positive economic data released over the past several weeks, one would think the Fed would have to jump in at some point. Late last year, the Fed announced that we might see two Fed Funds increases in 2019, in fact, Chairman Powell was rather certain about it. He made that statement last December.

Recently however, after a round of FOMC meetings, Powell stated there is no definite rate increase at sometime in 2019, after all. The change in tone has many thinking the Fed knows something we don’t but everyone, at least those who follow the markets, read the same data the Fed does. The fact is the economy is doing very, very well.

So then, why are rates still low? Historically, when the economy is doing well, investors will pull their money out of those boring, low-yielding mortgage bonds and put more money into stocks in hopes of greater gains. When demand for bonds, including mortgage bonds, increases, the yield on those bonds has to fall. That low yield translates into lower rates overall. But mortgage rates have been in a relatively tight range for quite some time, seemingly ignoring the fact the economy is more than just “on the mend” but marching forward.

One answer might be that rates are currently in the “Goldilocks” zone, meaning that rates aren’t too low nor are they too high. They’re just right. The Fed is currently on a “steady as she goes” tack and investors are taking note. Stocks are doing well and bonds are doing pretty good, too. Historically when stocks are strong, bonds take a breather. But right now, we’re sort of in the best of both worlds.

How long will it last? Who knows? But if you’re in the house buying mode it’s probably good advice to take advantage of where rates are today and not keeping your fingers crossed they’ll continue to remain where they are today. There doesn’t seem to be any evidence the economy is on a tear so strong the Fed has to step in but on the other hand there doesn’t seem to be anything to indicate the economy is slowing down. Interesting times.

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