Interest Rates and the Fiscal Cliff

Mortgage interest rates during the presidential campaign season have remained in a relatively steady range. Rates have been hovering near record lows. The fluctuations have been around a quarter point in rate. Rates for the balance of the year should remain steady to lower depending on pending action by the president and Congress to avoid the fiscal cliff in early 2013.

The fiscal cliff — a term coined by Federal Reserve chairman Ben Bernanke — is used to describe a raft of tax increases and spending cuts that will automatically come into effect at the beginning of 2013 if Congress does not take decisive action on the budget.

If automatic cuts are triggered, the economic recovery could be slowed due to the severity of those budget cuts as dictated by the fiscal cliff. One expects that the spirit or hope of bipartisanship will carry the day and ultimately encourage some type of compromise between the president and Congress to avoid the consequences of inaction.

Congress will also have to tackle the debt ceiling next year. If the talks around the fiscal cliff go badly, then the debt ceiling negotiations will be difficult and likely become a real struggle. Another possibility would be for Congressional leaders to strike a bipartisan plan that would take a more gradual approach to aus- terity measures including defense cuts. There is no clear-cut road map.

With Congressional elections two years away, one would think Congress would like to find a solution. The politics of obstruction failed to elect a Republican president. Voters are looking for an Obama-Christie moment more than a repeat of the deficit-ceiling debacle of last year.

Interest rates will benefit from the bad days during the evolution of the upcoming work on the fiscal cliff. If a compromise is finally reached, then money will go back into equity markets and taken from bonds. This would cause rates to go higher.

With the reelection of Obama the fiscal poli- cy of the Federal Reserve should remain dovish. With all the variables in the economy, including the effects of Hurricane Sandy, the Fed is not going to change policy at this time.

The one certainty in the coming weeks is there will be a lot of uncertainty, which will move the equity and bond markets. Look for rates to be reactive along with the progress of our post-election leaders.

Bill Starrels is a mortgage loan consultant who lives in Georgetown. He can be reached at (703) 625-7355 or bill.starrels@gmail.com.

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Fri, 25 Jul 2014 19:04:19 -0400

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