Since the passage of the new tax bill, which cut corporate and individual tax rates, it was feared that inflation would rear its ugly head and put the Fed on alert.
Those fears were confirmed in early February when the jobs report revealed that wage inflation came in higher than expected. Later that month, it was reported that the Consumer Price Index was also heating up. These surprise jumps in inflation sent mortgage and treasury rates higher.
Mortgage rates moved up approximately a 1/2 percent from 4 percent on the 30-year fixed to 4.5 percent. That is a huge move in such a short period of time. The inflation concerns also send the stock market into a tailspin, recording its biggest ever one-day drop of 1,175.
Why the big concern with inflation? Well the Fed was estimated to raise rates three times in 2018 and this latest rise in inflation could prompt the Fed to raise rates four times, which could then cool the economy and the stock market just as things began looking up.
Some analysts have argued that the tax cut has overheated the economy and should have been saved for a time when the economy was slowing down.
The other concern is that with the U.S. is now holding approximately $20 trillion in debt, which is expect to surge with the recent tax cut, climbing by $1 trillion in 2018 alone. When the Treasury needs to borrow more, it usually has to bid up the rate to attract buyers. That will also put an upward pressure on rates.
This all could change if inflation numbers cool down in the coming months, but based on what we are seeing, it’s looking like higher rates are going to be the new normal.
We are recommending to our clients that if they are looking to purchase this year that they move up their search because of the potential of higher rates later in the year.