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2023 Already… Now What?

The steps that will be taken to prevent too much inflation from breaking out

2023 Already… Now What?
Insider
Contributing Writer

At the beginning of 2020, pre-pandemic, all the “experts” thought that rates were going to go up. Who predicted a pandemic, and its impact on mortgage rates and housing market? When 2022 began, many were predicting higher rates, but not at the speed at which mortgage rates shot higher. And now economists are predicting interest rates to sag somewhat, and that we may have seen the high for 30-year mortgage rates.

We are reminded time and time again that if someone is going to predict an interest rate in the future, not to put a date on it, of if they’re going to put a date on it, don’t put a number on the interest rate. What if everyone thought we were going to see higher mortgage rates, and we didn’t? Remember that this is exactly what happened several years ago when the Federal Reserve Open Market Committee raised overnight Fed Funds in December of 2016, after which long-term rates dropped and stayed low for the next 10 months.

After the 2016 presidential election, the financial markets pretty much began assuming long-term rates, including mortgage rates, would be higher in 2017. Donald Trump’s potential agenda, which included big tax cuts, infrastructure spending, and broad hiring, certainly seemed to point toward higher rates.

Trump’s stated goals during his campaign implied that rates would be higher in a couple years, especially with the pressures from wage increases nudging inflation higher. But stimulative fiscal policy from the Trump administration faced an equal and opposite tightening of monetary policy by a Federal Reserve. (Remember that monetary policy involves changing the interest rate and influencing the money supply. Fiscal policy involves the government changing tax rates and levels of government spending to influence aggregate demand in the economy.)

As we forge ahead with 2023, the Fed, through the actions that the Federal Open Market Committee makes, is expected to continue to raise short-term rates initially, but then slow or stop the rate increases as their impacts on inflation and economy are felt. Among other actions, the Fed conducts “the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.” The U.S. central bank will continue to seek to prevent too much inflation from breaking out in an economy it believes is getting close to operating at its full potential.

The “smartest guys in the room” might be wrong with their forecasts. The era of very low rates came to an end in late 2021. But presidential administrations and agendas do make a difference. The Trump agenda began with a very vocal bang but packed less of a growth punch than some had imagined. If so, you would expect the same cautious approach to rate increases from the Fed. Or decreases should it come to that. The day after Donald Trump was elected, stocks rallied and bonds sold off/rates went up. Trump’s major tax cuts would tend to, it was believed, create a short-term boost in economic growth and higher interest rates. But Republican lawmakers who actually have to pass any changes to tax law, especially those in the Senate, were wary of tax cuts that would increase the budget deficit as much as  Trump’s campaign plan would have.

Regarding infrastructure spending, Trump had been short on details, and the details matter a great deal for how much an infrastructure plan could lift growth. For example, tax credits that make the finances of building toll roads more favorable are less likely to create a huge boost in activity than spending on upgrading physical infrastructure outright. Then, as now, on both tax cuts and infrastructure there’s no guarantee that the actual scale of stimulus will every match postelection talk.

Recently, and in the future, even if the U.S. economy does start growing faster, any administration appointees could change their tune on the desirability of higher interest rates. Politicians, once in office, tend to learn that they like low interest rates, and during the Trump administration some pushed for cheaper money and the Fed attempting to hold the line to prevent inflation. We will see what happens with the remaining years of the Biden administration, although so far it seems to have kept its hands off of Fed direction.

Critics say that some elements of Trump’s economic policy wound up being a drag on growth, such as a trade war with China or Mexico, immigration restrictions that limit the supply of labor, or geopolitical disputes. This is still being played out to some extent.

For the past few administrations, presidents have stayed away from weighing in on monetary policy and let the Fed act independently. Trump had described himself as a “low interest rate person” but attacked Fed Chair Janet  by name during the campaign. Biden has been letting the Federal Reserve handle things, for better or worse.

Looking ahead to 2023, even if the Fed kept its short-term interest rate targets high to combat elevated inflation levels, long-term interest rates, which are determined by the supply and demand of the bond market, may remain stable or actually drop. Trump didn’t feel bound by the traditions that have governed how recent presidents have acted, but Biden seems more predictable. The future of United States interest rate policy is always uncertain – like everything else in the future – but no one should be sure that long-term rates mortgage are destined to move dramatically higher if at all.

This article was originally published in the Mortgage Banker Magazine February 2023 issue.
About the author
Insider
Contributing Writer
Rob Chrisman began his career in mortgage banking – primarily capital markets – 35 years ago. He is on the board of directors of Inheritance Funding Corporation, of Doorway Home Loans, of AXIS Appraisal Management, and of the…
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