Life After Liftoff

If the Fed finally starts to normalize short-term interest rates, mortgage rates will start to move higher. Housing economists say the yield on 30-year mortgages could rise to 5 percent by the end of 2016.


Mortgage Banking

November 2015


By Robert Stowe England


In Samuel Beckett’s play Waiting for Godot, the despairing duo Vladimir and Estragon reach wit’s end waiting day after day for the mysterious Godot. At the end of the play, when Godot does not appear for yet another day, they agree to hang themselves on the morrow--unless Godot returns.


One might have thought the financial markets were channeling Godot after the Federal Reserve’s Federal Open Market Committee [FOMC] once again on Sept. 17 failed to raise the Federal Funds Rate, which has been stuck in a range between zero and 0.25 percent since December 2008.


The day after the Fed held off raising rates, the Standard & Poor’s (S&P) 500 Index plunged 32.17 points on heavy trading volume from 1,990.20 to 1,958.03.


Over the next week, the market indicator bounced downward another 76.26 points to land at 1,881.77 on Sept. 28. Over a seven-day stretch, the S&P 500 lost 5.4 percent of its value or 108.43 points.


Market observers tied the market’s volatility in part to the Fed’s failure to act after repeatedly indicating it planned to raise rates.


“The Fed chose not to move and, frankly, it’s not helpful for the economy, much less for housing,” says Doug Duncan, Fannie Mae’s chief economist. “Now what they’ve done is increase the uncertainty around the timing and nature of their next action. And the markets have shown that--some of the volatility is clearly related to that decision.”


Market expectations for a September rate hike were raised by remarks made on Aug. 29 by Stanley Fischer, vice chairman of the Federal Reserve, at an annual economic symposium in Jackson Hole, Wyoming, sponsored by the Federal Reserve Bank of Kansas City.


There is “good reason to believe that inflation will move higher as the forces holding down inflation dissipate further,” said Fischer. He was referring to the diminishing downward pressure on prices from a rising dollar and falling oil prices. In anticipation that rates will move toward the Fed’s 2 percent target inflation over the next few years, Fischer explained, the Fed could soon start the process of raising rates.


Persistent inaction by the Fed after such comments as those made by Fischer and other Fed officials is creating uncertainty, according to Duncan.


“There’s now no way to know exactly what they mean when they make statements like Janet Yellen [chair of the Federal Reserve] made at her press conference [on Sept. 17] that she still expects rates to be raised by the end of the year,” he says. “They’ve said that before, but they’ve not done it. There’s no way at this point to know what or when they will do things,” Duncan says.


The focus by markets on the timing of the first rate increase, while important, may miss the larger story of how high rates are likely to rise, according to Mike Fratantoni, chief economist at the Mortgage Bankers Association (MBA).


He says the market should also pay heed to the fact the Fed is going to move the rate eventually from zero to 3.5 percent and that the Fed considers 3.5 percent to be the right longer-term rate for Fed policy.


“In the Fed’s view, they are trying to communicate to the markets that the fact they may move in December rather than September is not terribly important,” says Fratantoni.


Fratantoni, however, sees the timing of liftoff to be more important than the Fed acknowledges. “The longer they wait, the faster they are going to have to raise rates. With faster rates, that increases the risk they will unintentionally push the economy into a recession in the 2017 and 2018 time frame,” he says.


Because inflation has remained low and has even fallen in the last year or so, it may have led the central bank to wait too long to raise rates, according to Mark Calabria, director of financial regulation studies at the Cato Institute, Washington, D.C. “The Fed is already far behind the curve. They should have moved a year ago. The Fed is in a box,” Calabria says.


Expectations about future inflation--not just today’s price increases--have also remained stable, giving the Fed considerable leeway to delay liftoff. The market, however, may eventually lose patience with inaction.


“If market participants start to believe the Fed is behind the curve, we can start to see that bleed into 30-year fixed-rate mortgage rates. So far, we haven’t yet. And I don’t think we will over the next year. But we might. Keeping an eye on inflation expectations is certainly important,” Calabria adds.


The global economy


The Federal Open Market Committee, in a prepared statement on Sept. 17, explained that the group had decided against an immediate rate increase in part because “recent global economic and financial developments may constrain economic activity somewhat.” The policy committee’s fear was that a higher interest rate, no matter how small, might aggravate any slowing trend in the global economy already underway.


The Fed’s decision on rates was made against a backdrop of slowing growth in China and an accompanying decline in commodity prices that has hit some emerging markets, like Brazil and South Africa, especially hard. There are also continuing worries about economic growth in the Eurozone, which over the summer endured yet another round of the Greek debt-default saga, as well as turmoil in the Middle East where ongoing conflicts could potentially interrupt oil supply and lead to a spike in oil prices.


Concern about the vigor and vulnerabilities of the global economy add a new wrinkle to the Fed’s traditional focus on its dual mandate of stable prices and maximum employment that was enacted into law in 1977 in amendments to the Federal Reserve Act.


Inflation target


As for the Fed’s mandate for stable prices, since January 2012 it has set an explicit inflation target of 2 percent. However, the inflation rate, as measured by the Consumer Price Index, has skidded along near zero in 2015 and was only 0.2 percent for the 12 months ending August 2015, according to the Bureau of Labor Statistics.


Clearly the recent pace of price increases is a long way from the Fed’s 2 percent target. However, the Fed looks at the likelihood that prices will rise higher and, if the prospect is likely that prices will move above the target, as Yellen and Fischer have explained, it can lead the Fed to start raising rates to keep price increases in check down the road.


In an address at the University of Massachusetts on Sept. 24, Fed Chair Yellen again reassured the markets that the Fed would likely raise its target range for the Federal Funds Rate before the end of 2015.


In its September 2015 outlook report, the Fed projects inflation will rise from 0.4 percent this year to 1.7 percent in 2016. It will then glide to 1.9 percent in 2017 and 2.0 percent in 2018. The Fed’s forecast is based on moves in the personal consumption expenditure (PCE) price index from the Bureau of Economic Analysis.


Maximum employment target


As for the Fed’s mandate on maximum employment, there is more evidence in the data to support a decision to raise rates. The Fed has identified 4.9 percent as the longer-term rate of unemployment consistent with maximum employment.


In its September 2015 outlook report, the Fed estimated the long-term normal rate of unemployment in ranged from 4.7 percent to 5.8 percent, with a median value of 4.9 percent. The jobless rate, as measured by the U.S. Census Bureau via the Current Population Survey, has been within that range since October 2014 and stood at 5.1 percent in September 2015.


The Fed’s September 2015 outlook sees the jobless rate falling below 4.8 percent and remaining there through 2018. That’s just below the Fed’s 4.9 percent estimate for the projected median longer-run rate for unemployment.


However, the Fed also forecast in September, that unemployment could fall as low as 4.5 percent in 2016 and 2017 and as low as 4.6 percent in 2018--levels that are presumed likely to drive up wage costs and inflation.


Based on its forecasts for economic growth, inflation and unemployment, the Fed expects its Federal Funds Rate to rise to 0.4 percent by the end of 2015, 1.4 percent in 2016, 2.6 percent in 2017 and 3.4 percent in 2018.


In her remarks at the University of Massachusetts in September, Yellen elaborated on the factors affecting monetary policy. She noted that the jobless rate is likely to continue to fall even if the Fed does not move to raise rates. In addition, the economy should strengthen as a number of economic headwinds abate. Those constraining forces include the share of households with underwater mortgages and high debt burdens, the inability of borrowers to access credit, constraints on spending by state and local governments, as well as weak foreign growth prospects.


Rising wages and a strengthening economy will require the Fed to move to raise rates, Yellen predicted. “[M]ost of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the Federal Funds Rate sometime later this year, and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective,” she said.


That statement was made before a disappointing report of 142,000 net new jobs in September. Only 118,000 of those jobs were in the private economy. The September report weakens the argument that the Fed needs to raise rates because the economy is strengthening.


September’s weaker report compares with the much stronger pace of 260,000 average monthly net new jobs in 2014. It’s also weaker than the pace earlier in 2015, when the economy created an average monthly 198,000 net new jobs.


Worse still, the labor participation rate in September fell to 62.4 percent, the lowest since 1977. The unemployment rate in September remained steady at 5.1 percent because more working-age people quit looking for a job.


Higher mortgage rates


All eyes are likely to be on the strength of the U.S. economy in the coming months because it is a key factor determining the direction of 30-year mortgage rates.


“As the job market improves and the unemployment rate drops, the expectation is that there will be upward pressure on wages and prices, given the tougher time employers are going to have filling slots, and that will feed into higher prices,” says MBA’s Fratantoni. Both higher wages and higher prices, in turn, will lead to higher longer-term rates in the United States.


A second key factor to watch is the direction of short-term rates orchestrated by the Fed, according to Fratantoni. Potential increases in short-term rates can translate into higher mortgage rates, even though such rates are typically tied to the longer-duration 10-year Treasury rate.


“Longer-term rates are really capturing the market’s best guess as to where short-term rates are headed over the next several years,” he adds.


The Fed’s expectation that the Federal Funds Rate is likely to rise to 3.4 percent by the end of 2018 provides the foundation for Treasury bond rates and mortgage rates. “Our expectation is that the 10-year Treasury rate is going to move in line with that expected increase in the Federal Funds Rate target, and in three or four years will be at 4 percent or a little bit higher,” says Fratantoni.


When the 10-year Treasury rate reaches 4 percent by 2018 or later, the 30-year mortgage rate will likely add another 1.5 percent to 2 percent points on top of that, Fratantoni explains.


“Our expectation is that in the next several years . . . mortgage rates are likely to trend upward to maybe about 6 percent,” he says.


Mortgage rates are likely to rise at a fairly slow pace along their way to a 6 percent rate, reaching 4.3 percent by year-end 2015 and just over 5 percent by the end of 2016, according to Fratantoni.


Freddie Mac also sees rates rising only gradually to 5 percent at the end of 2016, assuming the Fed moves to start raising interest rates.


“It’s been a very turbulent news year so far and I’m sure things won’t slow down, but the Fed, in our opinion, is going to be the main influence on mortgage rates,” says Sean Becketti, chief economist at Freddie Mac.


Overseas markets


Even after the Fed begins to move on short-term rates, the impact may be tempered by what’s happening in overseas markets. “One of the side effects of the Fed beginning to move, as well as disruptions in places like China, is that I think we will start to see more money flow back into the United States in terms of foreign investors,” says the Cato Institute’s Calabria.


Some of the flows returning to the United States will be invested in mortgage securities and could moderate mortgage rate increases, “at least initially,” says Calabria. “So we would not see that much of a jump in rates, depending on how much of the foreign money ends up in the mortgage market,” he adds.


Calabria expects that mortgage rates will be no more than 50 to 70 basis points higher in six months to a year from now, leaving the rates below 5 percent. Rates might even go down.


“I think we’re going to see rates bounce around in the band for a while. And keep in consideration whatever foreign investment flows might come into the United States, you might even see a small dip, but it’s hard for me to see that dip being more than 20 basis points,” says Calabria.


Market volatility


Slowing economic growth overseas, especially in China, and its impact on investment flows are also a factor in market volatility and can affect monetary policy decisions as well as the level of mortgages rates in the United States, according to Fannie Mae’s Duncan.


“China was the marginal demander of commodities, and when it became clear [its] growth was slowing substantially, that led to an adjustment for growth expectations around the globe,” explains Duncan, who notes that most major international forecasters have downgraded their economic forecasts for 2016.


“Well, that means less opportunity for valuable investments elsewhere and more capital flows to the U.S. capital markets, which will hold long rates down,” says Duncan. Thus, mortgage rates, in turn, also will be held down.


Capital outflows from China, the world’s second-largest economy, will be a key indicator to watch for its potential impact on market volatility, according to Duncan.


The Chinese data suggest there has been an accelerating pace of capital flows out of China since 2014. For example, in the first half of 2015, Chinese banks sold 647.4 billion more yuan ($101.85 billion) than they purchased, up from a foreign exchange deficit of 383.8 billion yuan ($60.38 billion) in the second half of 2014, according to China’s foreign exchange watchdog, the State Administration of Foreign Exchange.


China limits the exchange of yuan for foreign currencies by Chinese companies to approved business purposes. However, investors find ways to move money out of the country to circumvent official limits, making it hard to get an accurate reading of Chinese fund flows.


China’s currency reserves provide one indirect indicator of capital outflows. Since mid-2014, reserves have declined $436 billion to $3.557 trillion by September 2015. China’s currency reserves reached an all-time high of $3.993 trillion in June 2014. U.S. Treasuries make up a large portion of China’s reserves.


China abruptly devalued the yuan by 1.9 percent Aug. 11, then followed up with two more modest devaluations on Aug. 12 and 13, presumably to boost the competitiveness of its exports and thereby boost the economy. It may have instead prompted faster capital outflows. During August, China’s forex reserve dropped by a record monthly amount of $93.9 billion.


There are also worries about capital outflows coming to the United States from Europe. Over the summer, the prospect of another Greek debt crisis was resolved but the underlying problems remain, according to Duncan.


“Over the last year, up until the can got kicked down the road on Greece, that [crisis] was a significant factor in flows into the U.S. as well as dollar strengthening against the euro,” says Duncan.


The yield curve


Frank Nothaft, chief economist at Irvine, California-based CoreLogic, expects that, in fact, as the Fed raises interest rates, “the yield curve will flatten over the next year or so.” CoreLogic is forecasting that the 30-year mortgage rate will rise to 4.5 percent by the end of 2016. He does not see rates spiking to 6 percent.


“Rates today are dirt-cheap,” says Nothaft. “Over the next 15 months they will go from dirt-cheap to pretty low.”


Nothaft also does not see any significant rise in demand for mortgage credit that could push up rates based on any potential loosening of today’s relatively tight underwriting standards.


“Overall, when you look at loans being originated today and compare them to loans 15 years ago in 2000, it’s quite clear there’s been a fundamental change in the loan production process and very few people with low credit scores are obtaining new loans today,” Nothaft says.


“And low-doc and no-doc loans, or [alternative-A] prime, is largely absent from the market, too,” he adds.


Nothaft says that it is possible that underwriting might become more flexible once “the rules that have been promulgated by the Consumer Financial Protection Bureau [CFPB] become better understood by lenders, and lenders test how much flexibility there is in the underwriting frontier.” Even if credit loosens, it will be a gradual process, he adds.


“I don’t think between now and the end of 2016 there will be any large change in lending to people with low credit scores or to low-doc or no-doc borrowers,” Nothaft says. Thus, any potential expansion of credit availability through more flexible underwriting will not affect mortgage rates, he says.


There are some countervailing forces that could push up the long end of the yield curve and mitigate any flattening tendency.


For example, Freddie Mac’s Becketti thinks that in 2016 “there is some possibility that the Fed will start to trim very modestly [its] portfolio of mortgages, which would start to affect mortgage rates directly.”


In the past, the Fed was not in a position to influence directly points on the yield curve other than the shortest term--the Federal Funds Rate. With a huge portfolio of securities tied to 30-year mortgages, the Fed is in uncharted waters and is now in a position to move mortgage rates directly, Becketti says.


“If the Fed does choose to lighten up on that part of [its] portfolio, then investors will require a higher yield to take the additional supply,” he says. That will mean higher mortgage rates.


Another tantrum?


A number of economists are starting to warn that if the Fed continues to hesitate to start raising rates, it poses risks for the markets and the housing sector.


“All that delay will mean, in our view, that when they do start moving, they will move up more rapidly than what they had previously suggested,” Duncan says.


“If that happens, and it’s unexpected by the market, you can get the ‘taper tantrum’ kind of issue where rates could rise rapidly,” says Duncan.


The taper tantrum occurred in June 2013 after former Fed Chairman Ben Bernanke indicated in an offhand remark that the Fed would soon begin tapering the volume of its monthly purchase of U.S. Treasuries and agency securities. The comment caught the markets by surprise and sent interest rates soaring on a range of securities, including those in emerging markets.


The prospect of another taper tantrum kind of event “was the reason we were concerned that they didn’t move in September, because they had conditioned the market for making a move and then changed their mind. So now the market will be uncertain and the variability of the response will likely be greater,” says Duncan.


Duncan sees the potential for a market shock exists in the 200-point gap between current 30-year mortgage rates at 4 percent and the 6 percent average historic rate for mortgages going back to World War II (if you take out the very high-rate years of 1976 to 1979).


“If rates go up 200 basis points over a four- or five-year period, that’s not going to hurt housing as long as real incomes are also rising,” says Duncan. “If rates were to go up that amount and real incomes were flat, that would be difficult for housing. Gradually you’d see housing slow,” he says.


Monetary policy and the housing sector


Yellen stated at her Sept. 17 press conference that the Fed believes that while the housing market is “very depressed,” the sector could see significant growth from rising demand from the growing population of young people reaching prime homebuyer age, as the economy provides more jobs and higher incomes.


The Fed does not want to risk the possibility that higher rates may put a damper on the potential growth in the housing sector, Yellen indicated. “[W]e recognize that the housing market is sensitive to mortgage rates. It is an important factor. But that’s something that of course we’re taking into account in thinking about what’s the appropriate path of policy,” she said.


Duncan agrees with Yellen that a rise in new household formation can potentially increase demand for housing. “She’s correct in stating that housing starts are well below demographics,” says Duncan, noting that Fannie Mae estimates that housing starts right now are about 400,000 units a year below what the annual rate should be to meet the population’s demographic profile. However, because there are other factors limiting the construction of new housing, it is going to take time to add those 400,000 additional new units a year, according to Duncan.


The shortfall in housing construction is due to trends that monetary policy cannot affect, according to Duncan. “It is actually being driven primarily by the lack of access to skilled labor, which monetary policy has nothing to do with,” he says. It is also being driven by the inability of developers to get land permitted for construction and that’s also something that“monetary policy has nothing to do with.”


Continued low mortgage rates, however, can benefit the economy in other ways, according to Duncan. Underwater homeowners not qualified for Home Affordable Modification Program (HAMP) loans or Home Affordable Refinance Program (HARP) loans could benefit if house prices continue to rise at the current pace.


Fannie Mae expects home prices to rise 5 percent in 2016 after rising by 4.5 percent by the end of 2015. As home prices continue to strengthen, “that will bring more people out from being underwater and, if rates stay low, they can refinance,” Duncan says. That will provide some additional liquidity in the market, he adds.


Money supply


There are worries by some economists that the Fed’s relentless expansion of the money supply since 2008 will eventually explode inflation, which would require the Fed to push up the Federal Funds Rate much faster and to levels higher than the 3.5 percent the Fed has identified as the right longer-term trend consistent with an inflation rate of 2 percent and maximum employment.


The basic measure of the supply of money circulating in the economy--M1--has more than doubled from $1,367 trillion in December 2007 to $3.049 trillion in August 2015. In spite of the enormous surge in money, inflation has risen only 17 percent since 2007.


The fact there has been a doubling of money supply without a corresponding response in inflation creates the condition for an explosion in inflation down the road, according to Laurence Kotlikoff, professor of economics at Boston University and president of Economic Security Planner Inc., a personal financial planning software company based in Lexington, Massachusetts.


“I think interest rates only have one place to go--which is up and up and up--because the Fed has been printing money like crazy for seven years,” says Kotlikoff.


The reason the increased money supply has not led to inflation, Kotlikoff contends, is because the Fed has been paying interest on bank reserves since 2008 and that has prompted banks to increase their reserves at the Fed from a paltry $100 billion in 2008 to $2 trillion today.


“The Fed is bribing the public not to use the money they have issued, and that is why prices have gone up only 17 percent since 2007,” contends Kotlikoff.


Prior to 2008, the Fed did not pay interest on either required or excess reserves deposited by the banks. In 2007, for example, required reserves averaged only $43 billion while excess reserves averaged $1.9 billion. In 2006, Congress gave the Fed authority to pay interest on reserves beginning in October 2011. But in the summer of 2008, Congress moved up the effective date for the Fed to pay on reserves to October 2008.


Since January 2009, the Fed has paid banks 25 basis points on both required and excess reserves, in keeping with the Federal Funds Rate target range of 0 to 25 basis points during this period.


As the Fed has accumulated bank reserves, the velocity of money in circulation has gone down, Kotlikoff points out. The velocity of money is the number of times one dollar is spent to buy goods and services per unit of time, and changes in the velocity can increase or decrease the impact of a change in money supply. “The velocity of money is a function of inflation and inflation is a function of the velocity of money. So both can go up. If something got prices rising, they would rise even faster because velocity would pick up,” explains Kotlikoff.


The M1 money multiplier has also declined, as less of the money supply is lent out by banks, according to Kotlikoff. The money multiplier is the amount of money that banks generate through fractional lending as a share of their total reserves on deposit with the Fed. At the end of 2007, the M1 money multiplier was 1.625, according to the Federal Reserve Bank of St. Louis. That means that for every dollar on deposit as reserves with the Fed, banks lent $1.625.


The money multiplier plunged after the Fed starting pay interest on reserves in October 2008 and quickly fell to 1.003 in November 2008 and then moved lower after that. On Sept. 16, 2015, the M1 money multiplier stood at 0.726. That means that for every dollar banks had on deposit with the Fed, they were lending out 72.6 cents.


“So I think the Fed has been playing with fire,” concludes Kotlikoff. “If they raise interest rates, they will have to pay more money to bribe the banks to keep the extra money in reserves.”


Soaring U.S. debt


When the Fed was purchasing U.S. Treasuries every month as part of its quantitative easing program, the central bank was also keeping down interest rates to ease the burden of financing the federal government’s annual deficits, which ran at more than $1 trillion from 2009 through 2013 before starting to decline, Kotlikoff explains.


“We have a government that is fundamentally broke,” he says.


The Congressional Budget Office (CBO) estimates the deficit for 2015 will be $426 billion, but also forecasts the deficit will begin rising again in 2017 and return to $1 trillion in annualdeficits by 2025.


Debt as a share of the gross domestic product (GDP) of the U.S. economy has doubled from 35 percent in 2007 to 75 percent of $13.2 trillion in 2015, according to CBO. In its long-term forecast in July 2015, CBO estimated that debt would rise to 104 percent of GDP by 2040.


If one adds in the present value of off-balance liabilities such as Medicare and Social Security, the fiscal gap is actually $210 trillion or 211 percent of the nation’s $18.2 billion GDP, according to Kotlikoff.


The fiscal gap is “16 times larger than official U.S. debt, which indicates how precisely useless official debt is for understanding our nations’ true fiscal position,” Kotlikoff told Congress in testimony on Feb. 25.


“The Fed has been printing money to pay for the government’s expenditures at an incredible and unprecedented rate. It needs to be understood that ultimately countries that run high inflation are countries that are broke--and our country is very, very broke,” Kotlikoff says.


When the Fed raises rates, it will also have to raise the amount of money it pays on reserves in order to limit the inflationary impact of the expanded money supply, Kotlikoff explains.


Raising interest rates will also make the cost of servicing debt more expensive and make deficits worse, according to Kotlikoff. If the Fed raises the rate it pays on reserves from 25 basis points to 50 basis points and then to 100 basis points on $2.3 trillion of reserves, “at some point it’s going to be a big number,” says Kotlikoff. “And where is the Fed going to come up with that money except by printing more of it?”


No rate increases?


Some observers, despite all the assurances by the Fed, believe that conditions at home and abroad will make it very difficult to make the first 25-basis-points increase in the Federal Funds Rate anytime soon. In fact, the yields in the bond market and mortgage rates could actually move lower, according to Christopher Whalen, senior managing director in the Financial Institutions Ratings Group at Kroll Bond Rating Agency Inc., New York.


“There’s so much cash sitting around looking for yield that once we get everybody to stop thinking about China or commodities or the Federal Open Market Committee, which is admittedly a difficult thing, I think the natural tendency of the bond market is going to be to rally,” says Whalen.


“I would not be surprised to see the on-the-run Fannie and Freddie to get back down to 3.5 percent--it’s at 4 [percent] now,” Whalen said in late September.


Whalen also sees the Fed unable to raise rates at the short end of the market. “Other than adjusting the rate of fed funds, which is a market that doesn’t exist anymore, or changing the amount paid on bank reserves, I don’t think the Fed can really raise rates. I just think you’re going to have enormous pressure on the short end at zero because there’s nowhere for them to go,” he says.


Time to raise?


In the end, as Fed officials constantly tell the world, the timing of the decision to take the fateful step and raise the Federal Funds Rate by 25 basis points will depend on what the Fed sees in the data. Even while job creation seems to have weakened this year as compared with 2014, unemployment nevertheless has declined to 5.0 percent and the labor market looks likely to tighten further.


The situation in the labor market suggests that the decision on when to make the first move to raise rates rests on the Fed’s inflation outlook rather than current low inflation rates.


Fed Chair Yellen has said that inflation is likely to rise toward the Fed’s 2 percent target over the next three years as the headwinds restraining the U.S. economy and higher prices fade. She has also recognized that in pursuit of price stability, it usually requires moving to raise rates before signs of inflation appear.


If worries about growth in China, Europe and the emerging world subside, it would seem to set the stage for the Fed to finally make its long-anticipated move.


Yellen “does need to bite the bullet to some extent” and go ahead with the 25-basis-point increase the Fed has signaled it is prepared to make, Calabria says. “After all, we’re talking about a tremendous amount of accommodation the Fed has been providing for a very long time.”  MB



Robert Stowe England is a freelance writer based in Milton, Delaware, and author of Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance, published by Praeger and available at He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..


Copyright © 2015 Mortgage Banking Magazine

Reprinted with permission. All rights reserved



Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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