Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News
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Today’s consensus on mortgage rates goes something like this: Central banks
around the world are printing money like crazy in an attempt to stimulate (and
reflate) their economies and to keep their governments (and in many cases their
banks) from going broke. All of this ‘new money’ will eventually lead to higher
inflation and when it does, higher mortgage rates will inevitably follow.
I agree with this general premise but it omits the most important detail –
when.
While the Bank of Canada (BoC) and many prominent Big Five Bank economists
have until recently been warning Canadians that higher mortgage rates could be
just around the corner, I have consistently subscribed to the view that this day
of reckoning will actually arrive later than most believe.
Today, let’s look at the impact (or lack thereof) that the U.S. Federal
Reserve’s actions have had on the U.S. economy over the last several years –
it’s a key element in my ‘lower-for longer’ view. I am focusing on the U.S.
example because the U.S. and Canadian economies (and monetary policies) are
tightly linked and if the U.S. economy experiences significantly higher
inflation, we will import it.
For starters, it may be splitting hairs but technically the U.S. Fed isn’t
actually ‘printing’ new money. Instead, it is expanding its balance sheet by
increasing its purchases of U.S. treasuries which it typically buys from U.S.
banks. That action increases each bank’s reserves but has no impact on the
amount of money that is actually circulating in the economy. If the Fed wants to
increase the supply of money circulating in the real economy it needs U.S. banks
to act as the transmission mechanism, and it is here that the first breakdown in
its master plan is occurring.
Despite its best efforts, the Fed has not increased either the banks’
appetites for lending, or consumer appetites for borrowing. When once asked
about how to deal with this specific problem U.S. Federal Reserve Chairman Ben
Bernanke famously said that if the banks wouldn’t start lending more he would
drop money from helicopters directly into consumer’s wallets, earning him the
nickname ‘Helicopter Ben’.
