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History Doesn’t Repeat, but It Often Rhymes

October 17, 2016

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Payrolls increased by 156,000 last month, and the unemployment rate drifting from 4.9% to 5.0%. The unemployment rate actually rose because more discouraged workers sought employment, a modest but encouraging economic sign that may be just good enough to convince financial markets that it’s “game on” – an interest-rate increase is on the way. 

Election Day is Nov. 8; Federal Reserve officials meet again on Nov. 2. We’d be shocked if the Nov. 2 meeting produced an interest-rate increase. Most people concur with us. Traders in federal funds rate futures contracts are betting only an 11% chance of a rate increase at the next meeting. As for December, that’s a different story. These same traders are betting a 70% chance a rate increase will occur then. 

Of course, we’ve been down this road before. Last year around this time, mortgage rates began to drift higher as the market priced in a rate increase for December. But once the rate increase was announced, mortgage rates plateaued and then drifted lower through the first half of 2016. Those lows held until a few weeks ago. 

As Mark Twain observed, history doesn’t repeat, but it frequently rhymes. Should the Fed raise the federal funds rate in December, the increase will likely be no more than 25 basis points – the same increase as last year. And if history really does rhyme, we could see mortgage rates drift lower again.

 

 

 

 

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