Data Dots and Thoughts

Lately some of us have been discussing interest rates. I made the point they were falling despite the Fed raising the Federal Funds Rate (FFR). Some of you believe that interest rates are rising. So I decided to put down my JD for a minute and check with Fred at the Saint Louis Fed.

The chart below shows the rate on 30 year mortgages since 2007. The chart happily says we are both right if you look at the graph in more than one way. That's the nice thing about graphs -- if you look hard enough you can find a historical time period that fits what you told your friends while teetering on a bar stool at 11 pm. I won't name any bars in Bloomington except to note that the bartenders at Finch's Roost, the Malibu and Uptown Cafe now know how to make a Larry Old Fashioned.

Where was I ? Oh yea -- mortgage rates. I chose the mortgage rate because even Nathan understands mortgage rates. I chose the 30 year rate but the 15 year rate would tell us pretty much the same story. I also decided to start the charts in 2007 so we get a nice before and after photo. Notice the shaded area from 2008 to mid-2009 is the great recession. In case you were wondering, the rate before 2007 was generally higher than the 6ish rate right before the recession.

Most of us don't care that much about rates of the past. If you want to borrow money today you are going to pay around 4.5% -- the last dot on the chart. If you want to borrow money next week or next year then the whole chart might help you think about what rates are possible for sometime ahead in 2019.

What might you conclude about the future?

     Focusing on the last few dots you might wonder if rates are going to fall further. There is a tiny little downward trend going on. Will it continue?

     If you go back to early 2017 you see an upward trend interrupted by several months of downward movement. So you might wonder if that upward trend will continue into the future. Notice that by looking at previous upward trends (e.g. 2011 and 2013) the upward movement of the rate was followed by a negative trend.

      If you look at today's rate of 4.5%, it's lower than most of the dots before 2012  but higher than nearly all the dots after 2012.

     If you turn the graph sideways and the changes are left and right instead of up and down -- it kinda looks like a drunk stumbling down the sidewalk on Kirkwood Avenue in Bloomington.

Data is fun but it isn't the whole story. The above exercise is tedious if not frustrating. This is where analysis comes in. I hate to use the word "theory" because many of you skeptics get even more skeptical. But I like theory and it helps us think more about all these dots. What causes the mortgage rate to rise and fall? Thinking about all the causes might shed some light on the above speculations.

Applying theory to this discussion doesn't solve it because there will be differences of opinions about the importance of each causal factor we might discuss. But it does have the benefit of widening the discussion. For example, if the Fed raises the FFR, that increases of cost of money to the IU Credit Union and raises the interest rate. But if global economic changes imply less demand for borrowing, then that would have the opposite effect on interest rates. Which effect will be bigger in the future?

I think the global effect will dominate and rates are going to continue falling. Some of you hold the opposite opinion. Neither the data nor the theory can crown the winner. I guess we will just have to wait and see.