Many have wondered why interest rates have risen so sharply this year without the economy showing significant enough strength to heat up inflationary pressures. Yes, the threat of the Federal Reserve Board decreasing stimulus by lowering their purchases of Treasuries and mortgage-backed securities (MBS) hovers over the markets. Yet, the Fed would not be considering lessening stimulus if they were not more confident about the economy.
One must remember that the Fed put these extraordinary measures in place to keep us out of a second recession as the worldwide economy was slowing while we were struggling to come back from our deep recession. How many times did we hear that Europe's recession and fiscal crisis could drag us back into recession? The phrase “double-dip recession” became commonplace in media headlines for well over a year.
In the past we have asked the question: “Will Europe pull us back into recession or will we lead Europe out of recession?” An important theory arose this year … if the real estate markets in the U.S. continued their recovery, then it was more likely that our economy would help lift Europe. While we cannot say there was a direct relationship, the news released recently that the Eurozone experienced a positive quarter of growth bodes well for this scenario as well.
It is important to realize that a 0.3 percent growth rate for the 17-nation region is nothing to write home about. The fact is that any positive growth represents progress. One should also remember that the central banks in Europe have been applying their own brand of low interest rate stimulus.
In reality, we realize that Europe is not out of the woods and we are a long way from a normal recovery. However, the easing of Europe's recession weakens another significant threat to our economy. The Fed's reaction to lessen stimulus is a normal reaction to the lessening of threats. We are still a long way from ending all stimulus activity by the Federal Reserve, but the markets now recognize that we seem to be on the doorstep of the first move.
Dave Hershman is a top author in the mortgage industry with seven books published, including The Complete Mortgage Management Kit. Dave is also director of branch support for McLean Mortgage. He may be reached by e-mail at [email protected]
or visit www.originationpro.com.