End of Fed’s “Easing” Policies

A recent Bloomberg News article entitled “Bernanke Sees Beginning of End for Fed’s Record Easing” by Craig Torres & Jeff Kearns explores what our Federal Reserve Chair, Ben Bernanke, will do next regarding the benchmark lending rate. During his tenure he has, without precedent, published a “rate hike” schedule well into the foreseeable future. And more recently he has begun to falter on this promise.

As stated in the news article: “The conclusion to record stimulus may take years to complete as the Fed’s forecasts showed most officials don’t expect to begin raising the benchmark lending rate out of its lowest-ever range of zero to 0.25 percent until 2015. Bernanke, 59, whose second term as chairman ends on Jan. 31, warned investors against viewing the policy makers’ plans as inflexible, saying their decisions are not “deterministic.””

My speculation has always been and remains that the schedule is a way to keep banks from having to liquidate depreciating real estate assets. That in effect it created a tremendous spike in real estate prices by affording the banks the ability to control inventory. And, now that the economy is moving along at a more stable pace and banks ability to hold rental properties while prices stabilize and rental demand weans, Bernanke will allow for a rate hike to occur much sooner than promised. That’s because the impending rate hike will be based on a reactive need by banks and investors rather than a scheduled easing by the Fed. As we all know, big investors like to earn interest on their money.

The 30 year fixed mortgage interest rate has increased more than 1% since the last time Mr. Bernanke spoke. It is currently at $4.68%. My hunch is that by year’s end, the rate will be above 5%.