This month President Biden released his proposal for another fiscal spending bill, amounting to nearly $2 trillion. Whether you frame it as a patch to aid disaster or an actual stimulus, it further bridges the gap in income while the economy is restrained by Covid-19 restrictions. The proposal faces a party-split Senate, so whether the proposal remains intact or modified remains to be seen.
Economic indicators show a country waiting for a turnaround. Job losses (especially leisure and hospitality sector jobs) are growing due largely to reinstated Covid-19- related restrictions, and more people filed for unemployment benefits in Jan 2021. At the same time, as of Jan 10, the Bloomberg version of a consumer confidence index fell slightly yet again. Meanwhile the NY Federal Reserve’s index of economic activity improved just slightly.
Restaurants, which have suffered greatly in reservation head counts, are still finding ways to serve customers, according to Open Table data. Here in Washington state, Covid-19 restrictions are among the most stringent in the county with most restaurants in takeout mode. With the holiday travel season behind us, passenger traffic at airports is falling back again. Retail foot traffic experienced its biggest week-over-week decline in mid-January since March 28, 2020 with the rise of Covid-19 infections. The holiday retail bump is a distant memory already. All of this affects current consumer spending, although bright spots were year-over-year increases in groceries, retail products, and healthcare. With vaccinations starting up and more fiscal aid on the way, recovery is in sight. Will the fiscal aid be a long-term fix? No. When jobs come back, that’s when the real turnaround begins.
As for mortgages, opportunity is now. The Federal Reserve has manipulated long-term interest rates (where mortgages are affected) by buying bonds, despite the Fed’s fiscal stance to allow inflation to accelerate before raising short-term interest rates they directly control. With rising inflation comes pressure on long-term rates. In the last two weeks—thanks largely to news of the Biden-proposed spending bill–inflation expectations rose to their highest level in two years and the 10-year yield spiked to 1.19%, the highest level since last March. All of this is causing a higher spike in long-term rates.
Under normal circumstances a huge stimulus and rising inflation expectations would be enough to keep the Fed from buying bonds. Currently it is spending $120B in Treasury Bonds and mortgage-backed securities (MBS) every month which artificially suppresses long-term rates to stay relatively low. Rather than allow the market conditions inform the “real” price of interest rates, the Fed appears to continue its present bond-buying extravaganza. What this means for you is, as inflation expectations creep upward, the Fed may continue to buy additional bonds in order to keep long-term rates relatively low. As we near the end of January, already we’re witnessing a shift to slightly higher rates.
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