Yellen’s Federal Reserve To Keep Rates Low

The Mortgage Corner

The Fed’s FOMC minutes of their last meeting were just released, and they show the Fed intends to keep interest rates low for as long as possible, until the unemployment rate drops substantially. And the Fed’s maintenance of low interest rates will do the most to boost housing sales this year.

In fact, they are dropping the 6.5 percent unemployment rate bar that former Fed Chair Bernanke had said was the point at which they would consider beginning to raise interest rates. That’s because the 6.5 percent rate has almost been reached without any improvement in the long term unemployed. It’s at 6.7 percent in March and the Labor Department’s JOLTS report says that with 4.2 million job openings (blue line in graph), the 6.5 percent rate could happen anytime.


Calculated Risk

Jobs openings increased in February to 4.173 million from 3.874 million in January. The number of job openings (yellow) is up 4 percent year-over-year compared to February 2013, while the number of hires (blue line) hasn’t been rising as fast. So it seems reasonable that the hire numbers will pick up as more jobs become available. Meanwhile, the number of Quits and Layoffs (blue and red bars in graph) has been declining, another sign of improving job opportunities.

The Fed minutes also mentioned that there were other obstacles to higher employment—excess savings by both consumers and business that weren’t being productively invested—that could slow also down job formation.

In fact, the minutes for the first time stated that ‘lowflation’ was a problem holding back demand, and so hiring. Why? Because too low inflation—just above 1 percent at present—was a sign there wasn’t enough demand for goods and services to yet warrant additional hiring.

“Participants observed that a number of factors were likely to have contributed to a persistent decline in the level of interest rates consistent with attaining and maintaining the Committee’s objectives”, said the FOMC minutes. “In particular, participants cited higher precautionary savings by U.S. households following the financial crisis, higher global levels of savings, demographic changes, slower growth in potential output, and continued restraint on the availability of credit.”

This is basic macroeconomic theory that Fed Chair Yellen has researched, and the reason she is now the Fed Chairperson. She understands economics, and why job opportunities have been growing so slowly. Both consumers and businesses are holding on to their savings. So the Fed would have to see improvement in these factors, as well, leading to slightly higher inflation, before beginning to raise interest rates.

Real estate will also benefit from the Fed’s decision. One sign of better sales is that inventories continue to improve. Housing Tracker reports that 2014 existing-home inventories (red line) are slightly above last year and improving, due to fewer foreclosures and short sales.


Graph: Calculated Risk

“As of April 07 2014 there were about 745,168 single family and condo homes listed for sale in the 54 metro areas we track, said Housing Tracker. “The median asking price of these homes was estimated to be $269,029. Since this time last year, the inventory of homes for sale has increased by 7.7 percent and the median price has increased by 11.1 percent.”

This in itself will improve sales, but the continued prospect of lower interest rates will do the most to boost home sales this year.

Harlan Green © 2014

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About populareconomicsblog

Harlan Green is editor/publisher of, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
This entry was posted in Consumers, Economy, Housing, housing market, Politics, Weekly Financial News and tagged , , , , , , , , , . Bookmark the permalink.

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