“With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the Federal Open Market Committee (FOMC) said in its post-meeting statement. And so it begins. The Federal Reserve has officially given notice to the markets of their change in “easy money policy.”
As expected, The Fed left rates unchanged and continued with its rapid “Taper” (bond and treasury buying exit). The taper will likely be completed in March, at which time they would be in a position to start with its first rate hike (increase). I have been writing about this upcoming “Rate Hike” for quite some time, so this should come as no surprise.
The Fed needs to act. Consumer prices surged last year by the most since 1982, while employers continue to complain about difficulties in filling open positions. This recipe for the highest inflation numbers in 40 years is forcing the Fed response. Reports indicate that inflation is 7%, but experts say the actual number is substantially higher. In this context, I thought it would be helpful to give readers a little historical recap of what happened during years of high inflation and its aftermath over the past few decades.
In the 1970s, Arthur Burns was Fed Chair, and he mostly ignored inflation, which was rising rapidly. He insisted inflation would be “transitory” - which is what our Fed Chair was saying a few short months ago, as well. Year over year, inflation ballooned from 7% in 1978 to 14% by the time he left in 1980. Burns remained steadfast that inflation was “transient,” which caused mortgage rates to rise from 12% to 18%.
Paul Volcker served two terms as the 12th Chair of the Federal Reserve from 1979 to 1987. Volcker rapidly hiked the Federal Funds Rate from 11% to 20% in two years. (Reminder, The Federal Funds Rate is the only “rate” The Fed controls.) In reaction, inflation dropped from 14% to below 5%. Because inflation fell, mortgage rates sharply declined from 18% to 12%. In the aftermath of fighting inflation, the S&P 500 sharply declined by 30%, and the tighter monetary policy pushed the US into recession in 1982.
Alan Greenspan served five terms as the 13th chair of the Federal Reserve from 1987 to 2006. In the late 1990s, inflation doubled from 1.75% to 3.5%. Higher inflation caused mortgage rates to rise from 7% to 8.5%. Unlike Burns, Greenspan took action in 1999 and hiked the Federal Funds Rate by 1.75% (matching rise in inflation) from 4.75% to 6.5% in a year. Inflation responded and dropped from 3.5% to 1%. Mortgage rates dropped from 8.5% to 5.5%, sparking a huge refinance boom. Unfortunately, there were consequences to these actions as the S&P 500 fell by 50% in the fall of 2000, and the US entered a recession in 2001.
I am hoping to use this opportunity to educate homeowners on some of the implications of the Fed actions and encourage you to act now. It is expected that there will be a 25 to 50 bps increase in rates – which will have an immediate impact on non-fixed-rate loans, such as auto, home equity, and most consumer credit cards. If you are carrying such debts, your payments will likely rise quickly. Now is also the time to capitalize on the equity in your house. Please reach out for a no-obligation consultation on optimizing your mortgage to help build wealth and maximize your equity.
Shout out and happy birthday to Doren Chapman, Heather Corrigan, Dennis Eisenberg, Ahuvah Fried, Doron Hindin, Howard Milove, Helene Stein, and Avi Weisberg
Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well as specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected]