The most interesting graphs I have seen recently show the effective mortgage rate of homeowners (less than 4%) and the interest paid by corporations. Both groups realized that there was a window of opportunity in 2020-21 to lock in historically low rates and took advantage of it. As a result, the fastest interest rate hike in US history results in a large wealth-weighted percentage of consumers and corporations largely unimpacted by the interest rate increases (I am one). If we have a soft landing, that is likely to be the key reason. People and businesses living and dying by rapidly changing interest rates are going to get hit hard, but they are likely to be marginal to much of the economy unless CRE really blows up when it refinances. I note that I have had mortgages with rates ranging from 18% to 2.6% over the past 40 years, so I look at current mortgage rates available to buyers and view them as "normal".
With inflation still over the 2% target, I expect that the Fed will be keeping the Fed Funds rate higher than Wall Street thinks for longer without a likely return to the very low rates of the 2010s and 2020-21 in the next few years. I think the biggest question for 2024 is how the yield curve resolves itself? A negative yield curve of 1% or more is not normal at all. Are we in for another odd long period of time with a negative yield curve instead of the the unusual ZIRP policy that dominated for a decade?
Unemployment under 4% and GDP growth over 2% does not scream Fed Fund rate cut, but long bonds are behaving like we are in a recession. Fed Fund of 4% with a 10 year rate of 5% would be historically normal. Neither show an inclination to be at such a normal condition. I tend to believe long bonds over the stock market and Fed Funds rate, but both Fed Funds and long bonds have been manipulated by the Fed for so long, it is not clear what economic signals exist in either right now.
The most interesting graphs I have seen recently show the effective mortgage rate of homeowners (less than 4%) and the interest paid by corporations. Both groups realized that there was a window of opportunity in 2020-21 to lock in historically low rates and took advantage of it. As a result, the fastest interest rate hike in US history results in a large wealth-weighted percentage of consumers and corporations largely unimpacted by the interest rate increases (I am one). If we have a soft landing, that is likely to be the key reason. People and businesses living and dying by rapidly changing interest rates are going to get hit hard, but they are likely to be marginal to much of the economy unless CRE really blows up when it refinances. I note that I have had mortgages with rates ranging from 18% to 2.6% over the past 40 years, so I look at current mortgage rates available to buyers and view them as "normal".
With inflation still over the 2% target, I expect that the Fed will be keeping the Fed Funds rate higher than Wall Street thinks for longer without a likely return to the very low rates of the 2010s and 2020-21 in the next few years. I think the biggest question for 2024 is how the yield curve resolves itself? A negative yield curve of 1% or more is not normal at all. Are we in for another odd long period of time with a negative yield curve instead of the the unusual ZIRP policy that dominated for a decade?
Unemployment under 4% and GDP growth over 2% does not scream Fed Fund rate cut, but long bonds are behaving like we are in a recession. Fed Fund of 4% with a 10 year rate of 5% would be historically normal. Neither show an inclination to be at such a normal condition. I tend to believe long bonds over the stock market and Fed Funds rate, but both Fed Funds and long bonds have been manipulated by the Fed for so long, it is not clear what economic signals exist in either right now.
Would love to hear what the smart folks think about the costs of onshoring
more in 2024.