January 19th, 2015 4:17 PM by Dana Bain
Welcome to 2015.
At the beginning of 2014 every talking head on TV and the Internet predicted mortgage rates would rise. That is not exactly what happened, on a bond price basis rates improved by 5 discount points for roughly 1% in rate.
As 2015 gets underway it is important to look at what will drive rates and why. Here is a short list:
Federal Reserve: All eyes will be on Chairperson Yellen and the policy posse. Quantitative easing came to and end with no major market disruption. The next issue the Fed has to tackle is when to begin raising rates. Mrs. Yellen has been very clear since assuming the role as Fed Head that any actions the Fed takes will be “data dependant”. OK, so what will THEY be watching?
Jobs: The unemployment rate has fallen well below the levels where it was previously thought the Fed would act on a rate hike. The unemployment rate stands at 5.6%. As more people found work and the unemployment rate declined the economy did not improve as much as hoped. Despite earlier benchmarks set by the Fed to take action on rates, we learned that the benchmark is a “moving target”. This goes back to Mrs. Yellen’s statement on data dependency.
Dollar: What an interesting story the dollar has been. The US dollar is the world’s reserve currency and its value vs. other currencies is extremely important. A strong US dollar makes imported goods cheaper however it has an opposite effect for exports. Commodities are priced in dollars. All other influences being equal, a rising dollar will bring cheaper food and energy costs to US consumers. That is one reason the price of gas has dropped. Speaking of gas, let’s move to oil.
Oil: Without a doubt, the decline in the price of oil was the biggest financial story of the year. There are several reasons for the drop, not the least of which is the ingenuity of the US oil industry. The ability to extract oil from shale rock (fracking) is only five years old however it has literally reshaped the global landscape and upset the balance of power in several areas. The cost to produce oil in the US continues to decline driven by advances in technology. Some estimates have the US consumer saving $288B (1/4 of a TRILLION) dollars a year in the price of gas alone. While this is a good thing, it also pressures inflation well below the Feds target rate of 2%. This circles us back to the Federal Reserve.
If it sound like a circular reference, from the Fed to jobs to the dollar to oil and back to Fed, you would be correct. The US economy as measured by GDP is an $18 trillion dollar monster with many moving parts, which are all interconnected.