What the Current Canadian and U.S. Employment Trends Mean for Our Mortgage Rates
August 10, 2015Why Today’s Fixed Versus Variable Debate Is All About the Spread
August 24, 2015
Markets remain focused on whether the U.S. Federal Reserve will raise its policy rate when it next meets in September. Investors are assigning increasing odds that it will but I remain unconvinced.
There is no doubt that U.S. economy is improving and the U.S. job numbers have showed continued strength after some loss of momentum to start the year, but the future of the U.S. recovery is still far from assured.
For example, while the official U.S unemployment rate hovers at 5.3%, more detailed measures of the U.S. unemployment data which include discouraged workers and those working part-time because they cannot find full-time work indicate that more than 10% of the available U.S. workforce is still either unemployed or underutilized.
Meanwhile, overall U.S. inflation still hovers just above 0% and while it’s true that this is partly a result of the temporary effects of the surging U.S. dollar, other longer-term trends are also keeping prices down. For example, average wages have only risen by 2.1% over the last twelve months, which is less than would be expected given the improvements in the employment data, and falling energy costs have also helped to keep average prices in line.
Speaking of the surging U.S. dollar, prominent Canadian economist David Rosenberg recently noted that the Greenback’s sharp rise has created a headwind for the U.S. economy that is equivalent to a 3.00% rise in the Fed’s overnight rate, which is felt mainly by U.S. exporters whose products are now less competitively priced in international markets. If the Fed does raise its overnight rate in September, this rise will lift the Greenback higher still, thus exacerbating the impact of such a move.
There is an old saying that history doesn’t repeat itself but it does rhyme. To that end, the Fed is keen to draw lessons from its past monetary-policy mistakes and it remembers well that it raised rates too quickly during the Great Depression, prolonging that downturn as a result. This inherited bias towards looser policy is also bolstered by the Fed’s belief that its tools are better suited to reining in inflation if rates are kept too low for too long, as opposed to counteracting deflationary forces if rates are raised too quickly instead.
It seems clear from the recent commentary of its voting members that the U.S. Fed would like to raise its policy rate, and given that markets are expecting it to do so, perhaps September is as good a time as any. But is the Fed really ready to raise, or does it just want markets to think that it will do so as a way to keep lower-rates-for-longer speculators in check?
Today, the consensus believes that the Fed has to raise its policy rate soon in order to maintain its credibility, because it has long stated that its tightening timetable depends on steadily improving labour market conditions – and that improvement is now clearly in evidence. But the Fed has delayed tightening several times over the past few years, even when more explicitly outlined unemployment targets were met, and those decisions should serve as a reminder that the Fed is much less concerned with meeting the market’s expectations than it is with using monetary policy to help keep U.S. economic momentum moving in the right direction.
That’s why the contrarian in me still believes that the Fed will stand pat in September, even as the consensus predicts with increasing confidence that a rate rise is imminent.
Five year Government of Canada bond yields fell by six basis points last week, closing at 0.72% on Friday. Five-year fixed-rate mortgages are still offered in the 2.49% to 2.59% range and five-year fixed-rate pre-approvals are available at rates as low as 2.69%.
Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.80% range, depending on the size of your mortgage and the terms and conditions that are important to you.
The Bottom Line: While the consensus believes that the Fed will raise its policy rate in September, I am not yet convinced, for the reasons outlined above. That said, even when the Fed does ultimately decide to raise, a higher U.S. policy rate shouldn’t compel the Bank of Canada to tighten its monetary policy in response and that means that our fixed and variable mortgage rates should remain at or near their current levels for the foreseeable future.