Buy a home now.
Or if you already have one, refinance. And if you have extra cash, buy some shares.
And if there’s a bubble in prices, do not worry. It will be fixed later.
Simply put, this is the new message from the powerful Federal Reserve.
The central bank has just reviewed the objectives of its monetary policy. The translation of the layman? If you do not think the rates will be low for a long time, do not listen.
Cheap money is not a mod, people. Cuts to mortgage rates, for example, gave homeowners 25% more purchasing power in less than two years. That does not end soon.
So save the economy by borrowing at low-low rates and putting your money to work! Even if you have to pay record high prices for real estate like shares on Wall Street.
Now, rock-bottom interest rates can seemingly confuse some of you forever. I have answers to a few questions you may have.
Q. Who made the Fed king?
IN. That musical “Hamilton”? It was THAT man.
You see, the Fed has a very good job as the arbiter of interest rates, setting the right “lubricant” for the economy. It is a jungle of employment against inflation.
That job is harder than political division has made meaningful economic management at best inconsistent.
That I applaud the Fed for stepping into leadership. But this extended “free money” policy does not make much sense.
Q. What has changed?
IN. The Fed claims it can find no evidence that living costs are falling out of hand, based on its review of inflation rates.
The most notable nugget from the study shows that the pre-pandemic hiring spread (remember the “good ol ‘days”) did not incur significant labor costs. Your white, greedy bosses did not issue a big raise.
“A robust labor market can be sustained without causing an outbreak of inflation,” Fed Chairman Jerome Powell said in the announcement of the new policy Thursday.
Indeed, the Fed fears that total price power may be declining in the long run and warns the economic disease called “deflation” could be difficult to cure. Of course, the board members haven’t been shopping much lately, especially for a house.
Not only is this 0% here for a long time, the Fed says they will no longer increase the rates they control at the first inflation they may see.
Q. How will this help the unemployed?
IN. Interest rates can only go so far in adjusting the economy. Cheap money is much more useful to society than its non-nuts.
A simple example: Unemployed people do not normally borrow at rates controlled by the Fed – if they get loans at all.
This is an enormous bet by the Fed to attract and lend corporations and employees. That extra demand could put the unemployed back to work.
“Fed policy,” says economist Mark Schniepp of the California Economist Forecast, “sends a message that investment dollars are needed to get this economy and the labor market back sooner than all our forecasters say. Labor markets are now the top priority.”
Q. So 0% motivates people who can pay and invest. And that benefits the rest of us?
IN. Here’s what Ali Wolf, a real estate analyst for Meyers LLC, told me.
“What I am afraid of with their actions is that they will not only create a wealth gap between people, but also companies. The big companies are the ones that have redundant access to capital markets. That does not translate so well to the mom and pop shop in your local comic book mall. “
Q. So I should buy a house and / or shares?
IN. The theory is that enough people are buying houses or shares (a new car would also swell) … that spending can generate enough economic momentum to cure current unemployment.
Indeed, the rise of real estate as solid stock prices could sweep the economy.
Of course, then … the Fed would see inflation!
Q. You mean, the Fed’s making a bubble … only to burst it?
IN. Let me answer Professor Jim Doti of Chapman University.
“The unknown monetary stimulus we already had will lead to higher interest rates in the long run – maybe one to two years – including mortgage rates. That in turn will probably burst the bell. ”
Q. Come on, Jon. The bad guys of the Fed!
IN. In June 2005, when a housing block was being built, then-Fed Chairman Alan Greenspan said this to Congress …
“There can be little doubt that exceptionally low interest rates on 10-year treasury notes, and thus on home mortgages, have been a major factor in the recent rise in housing construction and turnover, and especially in the steep climb. “Although a ‘bubble’ in house prices for the country as a whole does not seem likely, at least there are signs of froth in some local markets where house prices appear to have risen to unsustainable levels.”
History can repeat itself.
