Traders, investors, market watchers, and potential home buyers are zeroing in on the recent all-too-familiar buzzword, inflation, and where it may be headed for decisions on portfolios as well as borrowing costs.
As the country moves to fully reopen and with consumers armed with stimulus money, pent up demand will be a key issue in the coming months when summer is at its peak. Americans are expected to be spending big on vacations as well as goods and services.
And what happens when there are too many dollars chasing a lower supply? Prices rise, and inflation sets in. Simply put, inflation is a general increase in prices and a fall in the purchasing value of money.
The Federal Reserve fully believes that the spike in prices will be temporary or transitory with a moderation in prices come fall. What we can expect over the summer months is that future inflation readings will be closely watched for sustained and substantial price increases.
Will the Fed be correct? We must remember that the Fed said that low inflation was also transitory. Low inflation lasted for ten years.
However, don’t fight the Fed! The Fed does have the ability to stave off inflation if they act at the precise time. If the Fed did see inflation being a prolonged occurrence, the Fed could enact Operation Twist or raise the Fed Funds Rate. But the Fed will have to walk a fine line to balance the economy from overheating or underperforming.
Operation Twist is the selling of near-term Treasurys and buying longer-dated ones to push long-term rates lower.
Bottom line: If the Fed is right and inflation does moderate in the fall, we will not see any major increase in rates. If the Fed is wrong and we see sustained higher inflation, the Fed will likely adopt the above tools to help keep long-term rates low. This means there should be no major increase in home borrowing costs. Is this a win-win for the mortgage market? Time will tell.
Source: Mortgage Market Guide
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