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Why Are Rates at 2017 Lows?

April 18, 2017

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Three months ago, talk of accelerating economic growth and rising inflation was all the rage. Business activity would accelerate once President Trump implemented his pro-growth agenda, which included repeal of the Affordable Care Act and lower income tax rates for businesses and consumers.

In such a scenario, surely the Federal Reserve would be aggressive in raising the federal funds rate — at least three increases were in the cards. In anticipation of such a scenario, interest rates across the board begin to rise. The yield on the 10-year U.S. Treasury note hit 2.6%; quotes of 4.375% on the prime 30-year conventional loan were occurring with greater frequency. 

Fast forward to the present and we find the outlook has materially changed. Many economists have throttled back their growth expectations, and it appears for good reason when one vets the latest employment numbers. Payroll growth posted at a paltry 98,000 for March. This was the lowest monthly increase since June 2016. 

President Trump’s pro-growth agenda, which was expected to be pushed through Congress at maximum velocity, has hit a political brick wall. Here we are in April, and Trump and the GOP have abandoned the Affordable Care Act issue. What’s more, the Trump administration has signaled there won’t be any attempts at tax-rate cuts anytime soon. 

Over the past month, exuberance has given way to apathy, which is reflected in a downturn in stock prices and an increase in risk avoidance. The yield on the 10-year Treasury note has dropped below 2.3%. Traders in fed funds rate futures contracts are giving good odds for a second Fed interest-rate increase; they’re giving only fair odds for a third rate increase. A month ago, they were giving good odds all around. 

So it appears we are caught in an economic stasis. Given the gridlock in Washington, outside of war (which would be an obvious bad thing), there isn’t much on the horizon to get the economy or interest rates moving one way or another. Therefore, we see current rates continuing to dominate, though today we’d be even less surprised to see sub-4% quotes on a 30-year loan pop up with greater frequency.

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