World Bank Places Pressure on Federal Reserve to keep Mortgage Rates Low
Looking back at the events from 2007 is sure to fill any American with dread. This was the advent of the financial crises that rocked America, and the world as it resulted in a significant global economic downturn. During this time, the Federal Reserve stepped in and made an attempt to stabilize the country one more time, by focusing on the economy and the financial system.
People needed to have access to funds so that they could purchase more assets and finance their lifestyles. So one move that was made at that time was to lower the short term and long term interest rates. This affected the mortgage rates, leading to rates that were lower than they have ever been before.
Mortgage Rate Spirals Down
Until the end of last year, the downward spiral of mortgage rates in the US has home buyers rejoicing and experiencing some much-needed relief. For the past few months, the mortgage rates for a typical 30 year fixed mortgage have dropped from around 4.4% to 4%. This is lower than they were at the same time last year, where the average value was just above 4%. However, there have been minor fluctuations along the way, hinting that this state of affairs is likely to take an unfortunate twist.
This is indeed excellent news for the housing industry, which is about to enter a period of exponential growth, with more people choosing to be homebuyers in this friendly market
There is, however, a damper to this good news that could affect the entire housing industry, and according to the World Bank, could also impact the world. This is because, after a period of lows, the Federal Reserve has announced that the mortgage rates are expected to rise to 5% by the end of 2015.
World Bank Views on Developing Economies
The World Bank believes that a rise in the year 2015 would cause a global shake-up in economic growth, particularly for developing countries. This is in line with their new global growth outlook, where they have actually cut back on their previous predictions for growth. They had previously predicted that the world economy would expand by 3%. That was in January of this year. Now, they predict that is will expand by only 2.8%. The term that has been aptly used by the Kaushik Basu, the World Bank’s Chief Economist is “fasten your seatbelts.”
This term gives rise to the assumption that countries around the world are in for a wild ride – and from the sound of it, one which will not have a big and happy ending. As it is, the exchange rates around the world are extremely volatile, and this in turn is actually limiting the extent to which the global economy can grow. And the US amending their mortgage rates at this point will only make things worse.
One of the expected results of a change in the US interest rates, particularly if they go up, is that the costs of borrowing would also significantly increase for developing countries. This is the wild ride that Basu was probably referring to, as the spillover effect could cause significant changes in a developing countries operations. What could be the saving grace in some aspects would be the lower commodities prices although these will take some time before the changes can be seen and felt.
One would imagine that the increased mortgage rates could help the US grow their home economy though according to the World Bank, this does not appear to be the case. As it stands, the World Bank have actually already lowered the growth outlook for the US, bringing it down to 2.7% for 2015 vis a vis the initial prediction of 3.2% at the beginning of the year in January.
As the economy seems to be fluctuating, the World Bank advises the US to wait for some stability, and only opt to increase their interest rates in 2016. This should in turn lead to less damage to the exchange rates, and prevent serious negative repercussions to a host of other countries as well. If the US were to take into account certain economies that are in a recession, such as Brazil and Russia, then they should be able to wait and make a move in a better economic climate.
Federal Reserve Stance on Interest Rate Increases
However, the people at the Federal Reserve have a different view of this and insist on increasing the interest rates this coming September. Their view is based on the growth of the US economy to date. Interest rates were initially reduced to encourage people to purchase assets and get themselves back on solid financial footing. Here we are almost a decade later, and several things have already improved.
First, the labor and employment rates have increased considerably, meaning fewer people need that added financial concession in order to survive. In addition, the economy continues to grow from strength to strength. There are more successfully businesses, more spending in retail by consumers, and increased success in the housing industry and the financial markets.
The Chair at the Federal Reserve, Janet Yellen, believes that it is time to make a change. She argues that by the end of this year, the timing will be just right to increase the interest rates. Although this increase may give the people a sudden jolt in their finances, it will taper off into very slow growth in the years to come. She offers this key piece of information to home buyers, to reassure them that an increase in mortgage rates will not necessarily cause a huge dent in their finances.
With more people signing on the dotted line to purchase a home, different regions within the US are experiencing increased growth. The housing industry continues to grow as well as the prices for new houses increase, and their sales surpass what leading economists had anticipated.
The expected increase to 5% should remain so until at least the middle of 2016 when a marginal increase may occur.
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