A commenter asks:
1. I have tried to make the point that rates will not go up because the FED will not allow it and other readers have commented that the FED can to control rates, only the market can. Why is it then that you state at the end of your post , "...the fed is all about keeping rates lower than they should be"?1. The Federal Reserve does not have full control over interest rates, they only have influence, that influence changes over time.
2. When you say, "so while I expect rates to climb significantly, say to 7 percent as a first stop...", are you speaking of the 30 year fixed mortgage?
For example, at the present time, we are in a generally low interest rate environment. This is partly because of Fed money printing activities, but also because individual investors are generally afraid of stocks at the present time and prefer what they perceive as the safety of fixed income investments. (Note: They are likely to be very wrong about the safety of many of their fixed income investments.)
But suppose price inflation starts to climb, at such time there will likely be strong upward pressure on interest rates. The only way the Fed would be able to fight this is to print more money, initially putting downward pressure on rates. But the newly printed money would eventually cause even greater price inflation and even higher interest rates, so you get a tiger by the tail situation.
Interest rates may start to climb toward 7%, but the Fed prints more money causing rates to stabilize around 5%, but this causes even more price inflation and interest rates climb toward 10%. The Fed prints even greater amounts of money, which results in rates stabilizing around 7%, but the newly printed money causes rates to climb toward 12%. The vicious circle continues. The only way the vicious circle can be stopped is by the Fed stopping the printing of money and allowing rates (that they can't control completely) to peak out, otherwise its hyper-inflation.
The U.S. came near hyper-inflation during the Jimmy Carter administration when G. William Miller was Fed chairman. In a panic about the inflation and not knowing what to do, Carter asked David Rockefeller for advice. Rockefeller told him to put his man Paul Volcker as Fed chairman. Volcker stopped the crazed money printing and allowed interest rates to find their own level.
|Interest rates during the Paul Volcker Fed chairman era.|
When Volcker took over as Fed chairman T-Bill rates were at 9.52%. As Volcker allowed rates to rise, they peaked in 1981 at 15.51%. He started printing again in August 1982 (probably on orders from Rockefeller), and rates dropped to 8.68%. Early on in his period as Fed chairman, he had killed the inflationary fears and could get away with the new printing. But, when the inflationary fears are strong, it is impossible for the Fed to keep a complete lid on interest rates.
2. I used 7% as just an example in my mortgage example. It wasn't a forecast, though, I suspect that on a first run that is where mortgage rates, over a year or two, would stop.